South Korea Proposes $8.6 Billion Supplementary Budget Amid Economic Challenges

Government Response to Trade Wars and Domestic Uncertainty

On Friday, South Korea’s government unveiled a supplementary budget proposal amounting to 12.2 trillion won (approximately $8.60 billion). This initiative aims to address escalating risks to the nation’s economic growth, primarily stemming from a global trade war and domestic political turmoil.

Supporting Key Sectors

The budget proposal follows recent government actions that included support packages for the country’s auto and chip industries. These sectors have historically fueled the trade-dependent economy’s robust exports to the United States but now face pressures from U.S. tariffs.

Concerns Over Liquidity

In a cabinet meeting, Acting President Han Duck-soo expressed concerns regarding several companies grappling with liquidity issues as a result of the global trade conflict triggered by U.S. tariffs. He highlighted fears that these challenges could lead to broader financial market constraints.

Monetary Policy Adjustments

In response to significant uncertainties linked to U.S. tariff policies, the Bank of Korea indicated its intention to cut interest rates in May. The central bank left open the possibility for further monetary easing after holding rates steady on Thursday.

Impact on Economic Forecasts

The Bank of Korea reported a considerable downside risk to its initial growth forecast of 1.5% for the year. It suggested that the economy might even have contracted in the first quarter. The proposed supplementary budget is projected to enhance growth by 0.1 percentage points.

Budget Breakdown and Financing

Of the proposed 12.2 trillion won increase in spending, 8.1 trillion won will be financed through the issuance of additional government bonds, according to the finance ministry. The budget includes various allocations, such as:

• 2.1 trillion won for trade risk mitigation.
• 1.8 trillion won to bolster the artificial intelligence sector.
• 4.3 trillion won designated for financial support to small businesses.
• 3.2 trillion won for responses to natural disasters, notably following record-setting wildfires.

Fiscal Impact

The supplementary budget will elevate the country’s fiscal deficit to 3.2% of Gross Domestic Product (GDP) from the previous 2.8%. Additionally, government debt is anticipated to rise to 48.4% of GDP, up from 48.1%.

Foreign Exchange Stabilization Bonds

Moreover, the finance ministry plans to increase the ceiling on foreign exchange stabilization bond sales in foreign currencies to $3.5 billion this year, up from the prior cap of $1.2 billion. This decision aims to prepare for potential market volatility while correspondingly reducing the ceiling for won-denominated bond issuance.

Political Context

In December, the opposition-controlled parliament passed a government budget that significantly reduced the initial proposal. The opposition’s refusal to fully endorse the budget was cited by former President Yoon Suk Yeol as a contributing factor to his controversial declaration of martial law, an action that precipitated South Korea’s most significant constitutional crisis in decades.

Leadership Change and Upcoming Elections

Former President Yoon was impeached earlier this month, leading to his removal from office, with a presidential election scheduled for June 3. This political shift adds another layer of complexity to the country’s economic landscape.

Parliamentary Approval Needed

The latest supplementary budget proposal awaits approval from the parliament, which is currently dominated by the left-leaning Democratic Party. The party has argued for a more substantial supplementary budget totaling 35 trillion won.

Conclusion

As South Korea grapples with significant economic and political challenges, the proposed supplementary budget reflects the government’s efforts to mitigate risks and stimulate growth. The effectiveness of this budget, however, will depend on the approval from parliament and the response of key sectors impacted by external trade dynamics.