Korea Eyes New Extra Budget as Central Bank Flags Stimulus Exit

© Reuters.

(Bloomberg) — South Korea is keeping its fiscal spigot open even as a quickening economic recovery prompts the central bank to signal it will rein in stimulus at some point.

Finance Minister Hong Nam-ki said Friday the government will consider another extra budget to achieve a “full recovery” from the pandemic, which would mark the sixth such spending package since the onset of the crisis.

A week earlier the central bank raised its growth forecast for the year to 4%, and flagged the need for a timely and orderly adjustment of record-low rates.

The potential policy divergence comes as governments and central banks across the world seek to keep recoveries going by avoiding a premature exit from stimulus, even as side effects from an extended period of cheap money become more evident.

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In Korea, close coordination between the BOK and President Moon Jae-in’s administration has helped the economy recoup its pre-pandemic size earlier than most countries, but there are still pockets of weakness that need to be addressed. Meantime, the housing market is running hot and household debt is surging, raising concerns over financial imbalances.

No additional bonds will be issued to fund the next extra budget, thanks to excess tax revenue amid the recovery, Hong said in the meeting with economists. The comments came as Moon calls for expansionary spending through 2022 to bridge wealth gaps that have worsened amid the pandemic.

“The government is helping small businesses prepare for better times, and if the economy does improve, they could withstand the impact of a BOK rate hike,” said Park Chong-hoon, an economist at Standard Chartered (OTC:) Bank in Seoul.

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Korea’s spending spree has pushed debt levels well beyond 40% of gross domestic product, which previous administrations saw as a ceiling. Still, the government’s balance sheet is in relatively good shape compared to other developed nations, thanks to years of fiscal prudence.

Hong didn’t indicate the size of the potential extra budget. Korea earlier this year approved a 14.9 trillion won ($13.3 billion) stimulus package.

(Updates with economist comment.)

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