Credit Herald

South Korea’s new Finance Minister Yoon Jeung Hyun pledged to increase stimulus spending after forecasting the economy will contract about 2 percent this year and lose around 200,000 jobs.

Yoon’s estimate is a reversal of the government’s December prediction of 3 percent growth in 2009 and would be South Korea’s first contraction since the Asian financial crisis a decade ago. The government will submit a spending plan to parliament by the end of March, he told reporters in Gwacheon today, declining to say how much extra stimulus is sought.

South Korea already has allocated 51 trillion won ($36.8 billion) in tax cuts and infrastructure spending to shore up domestic demand as exports decline, consumer confidence drops and unemployment climbs. Yoon, 62, began in the nation’s top finance post today after President Lee Myung Bak replaced most of his economic team following a slump in voter support.

“South Korea faces substantial downside risks and policy makers ought to take active steps, even more than they feel comfortable with,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “The government can use the extra budget to help middle and low-income earners, while the central bank can cut rates further.”

The Kospi stock index fell 0.6 percent to 1,196.02 at 1:53 p.m. in Seoul, narrowing this year’s gain to 6.4 percent. The won slipped 0.4 percent to 1,386.56 against the dollar.

Asian Efforts

Policy makers across Asia are stepping up spending to revive their export-dependent economies.

China is rolling out a 4 trillion yuan ($585 billion) stimulus package, equivalent to almost a fifth of gross domestic product, to support an economy that is growing at the weakest pace in seven years. Japan’s 10 trillion yen ($111 billion) relief measures are worth about 2 percent of its economy no telecheck payday loans.

South Korea’s economy shrank 3.4 percent last quarter from a year earlier, the first decline since 1998, and exports fell a record 32.8 percent in January. The number of South Koreans with jobs dropped in December for the first time since 2003.

“We’ll place utmost priority on creating jobs through activating domestic demand and will pursue a supplementary budget as early as possible,” Yoon said in his inauguration speech. “I will do my best so the economy turns around next year,” he added, without providing a growth forecast for 2010.

Yoon also said the government will inject capital into financial institutions “preemptively” if needed.

South Korea is setting up a 20 trillion won fund to be used for buying banks’ preferred stock and subordinated debt as the weakening economy increases bad loans and erodes banks’ capital.

Interest Rates

The central bank last month cut its benchmark interest rate to a record low of 2.5 percent and will reduce borrowing costs again this week, according to a Bloomberg survey of economists.

Asia’s fourth-largest economy will shrink 4 percent this year, the International Monetary Fund forecast last week. The IMF predicts a rebound to 4.2 percent growth in 2010.

Yoon replaces Kang Man Soo, who was voted the worst minister in the nation’s economic team in a December poll of 82 economic professionals by civic group Citizens’ Coalition for Economic Justice. Yoon was head of South Korea’s financial services regulator from 2004 to 2007.

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