The government unveiled a 14 trillion won ($10.7 billion) stimulus package to calm down the unstable domestic and foreign financial markets which originated from the Wall Street turmoil in early November.
Of the 11 trillion won, the government will spend 4.6 trillion won on expanding infrastructure while providing 3.4 trillion won to financially distressed small and medium-sized enterprises, small business owners, farmers and fishermen.
About 1 trillion won will be set aside for supporting low-income households and an additional 1.1 trillion won to local governments. Public enterprises will also expand their investments by 1 trillion won.
These measures are designed to cushion the impact of global slowdown next year by creating more jobs and activating the real economy, Minister Kang said.
The ongoing global financial turmoil stemmed from the US sub-prime mortgage credit crunch is causing concerns over a global economic downturn, threatening the Korean economy, the nation's top financial policymaker said.
Related to this, the government will revise the 2009 budget bill upward. The initial budget calls for 273.8 trillion won in spending, up 6.5 percent from this year's 257.2 trillion won, while issuing government bonds worth 7.3 trillion won.
But 2009 state expenditure will jump to 283.8 trillion won through the issuance of more state bonds. Most of the planned 3 trillion won in additional tax cuts will be provided to help companies expand plants and other business- related facilities.
Policy effects & economic prospects
Before announcing the 14 trillion won stimulus package, the government came out with a 19 trillion won step to tide over difficulties stemming from high oil prices and inject fresh vigor into the ailing economy.
Accordingly, the government unveiled a stimulus package totalling 33 trillion won (US$25 billion) to propel growth to the 4 percent range, create 200,000 jobs and post a current account surplus of US$5 billion next year.
The package is equal to 3.7 percent of the gross domestic product (GDP). The government expects the inflation rate to fall to the 3 percent range next year from the upper 4 percent range this year, with the current account shifting to a surplus of US$5 billion from a US$10 billion deficit this year.
The package highlights 11 trillion won in additional fiscal spending to initiate public infrastructure projects, and 3 trillion won in tax cuts. All in all, Korea will spend a total of 33 trillion won to forestall recession next year, Minister Kang said.
Foreign exchange and financial markets
Following a US$30 billion currency swap agreement with the U.S. signed on Oct. 30, the government will continue expanding existing bilateral swap arrangements with China and Japan, as well as establish a tripartite swap fund, the top financial policymaker said.
In order to boost the nation's foreign reserves, the government will increase the ceiling on the issuance of foreign exchange stabilization bonds from the current 15 trillion won per year to 20.6 trillion won, he said.
At the same time, the government will expand the Export Insurance Fund to 170 trillion won in 2009 from the current 130 trillion won, as well as sign free trade agreements with more countries in a bid to promote exports and improve the current account balance.
It also plans to increase international cooperation with G20 members to effectively deal with the worldwide financial turbulence.
Along with this, the Bank of Korea will provide liquidity to securities firms and asset management companies by purchasing repurchase agreements to calm down the domestic financial market. The government will also encourage institutional investors' roles in the stock market.
Support for small and medium-sized firms
To help small and medium-sized companies ease their financial burdens, the government will prevent healthy enterprises from going bankrupt owing to a short-term liquidity shortage, Minister Kang said.
He also said that the government will ask banks to lower lending rates to low-income households and expand welfare programs.
The government will provide 1.3 trillion won to state banks, including the Korea Development Bank, to have them lend more money to small and medium-sized companies while expanding credit guarantees to them by contributing 6 trillion won to the Korea Credit Guarantee Fund and the Korea Technology Guarantee Fund. Commercial lenders will also be requested to roll over loans extended to viable small companies.
For middle and low-income brackets, the government will ask Korea Housing Finance Corp. to lower mortgage rates and convert floating-rate loans to fixed-rate ones and increase long-term fixed-rate mortgage supplies.
Minister Kang said the government will make more efforts to solve the youth unemployment problem by expanding internship programs and enhancing job-training programs.
In line with this, the government will improve welfare support for lowincome families and increase financial support for the unemployed and scholarship programs for low-income students.
It will also request credit card companies to pull down credit card transaction fees for small retailers.
Stabilization of real estate market
Minister Kang said that the government will ease restrictions on the reconstruction of apartment buildings and reduce the number of small-sized apartments required to help increase housing supplies in urban areas and property transactions.
It projects to slash the number of property speculation zones across the country. Only Gangnam, Seocho and Songpa districts in southern Seoul will remain as the regions subject to strict regulations on speculation.
At present, Seoul and most of its adjacent areas are designated as the zones for speculation, making it difficult to trade homes due to tight lending limits and punitive taxes.
Residents living outside of the zones can take a larger proportion of mortgage loans out of their home value because they are subject to the loan-to-value ratio of 60 percent, whereas those within the zones are under a 40 percent LTV ratio.
To support the struggling construction industry, the government will enable the Korea Credit Guarantee Fund to offer additional liquidity to builders by guaranteeing the government's construction contract credit up to 30 billion won per company.
For active investment and more jobs
To encourage businesses to expand investment and create more jobs, the government will streamline and reduce excessive regulations regarding environment, land use, and labor issues, the finance minister said.
To this end, regulations on plant construction, facility expansion or relocation of industrial complexes in growth management zones and population control zones will be eased. A ban on large-scale building construction in wilderness areas will also be lifted as long as buildings meet pollution limits.
Environmental regulations deemed too excessive compared to those of the nation's competing countries will be reviewed and streamlined. Rules within environment protection zones will be converted from location restrictions to total mass emission control.
The government will also exert allout efforts to enhance labor market flexibility. The employment system for temporary workers and dispatched workers will improve and complementary measures to ease the burden of enterprises will be considered.
Along with this, the government plans to encourage new investments and facilitate job creation through service sector regulation reform. More efforts will be made to increase the competitiveness of high value-added services including broadcasting, advertising, and design.
