[Weekly Review] "Stop the COVID-19 Crisis"... 20 Trillion+∝ Fiscal Injection Planned

From Consumer Coupons to 'Good Landlord' Support
Over 26 Trillion Won in Additional Budget Expected Next Week
January Industrial Trends Show Recovery Stalling and 'Shaking'

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Kim Hyun-jung] The government has decided to pour more than 20 trillion won in fiscal resources to minimize the social and economic damage caused by the novel coronavirus disease (COVID-19) crisis. Including the supplementary budget plan, which will be announced next week with specific details and scale, the total is expected to exceed 26 trillion won.

The economy was already showing signs of slowing down before the full impact of COVID-19 was reflected. Consumption recorded its largest decline in 8 years and 11 months, and investment also showed a sluggish trend. There are concerns that related indicators will worsen further from February, when the negative effects of COVID-19 are fully reflected.

◆ Announcement of 20 trillion won fiscal support plan... from coupons to rent support = On the 28th, the government held an Economic Ministers' Meeting on COVID-19 Response and Economic Vitality Measures chaired by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki at the Government Complex Seoul, announcing the 'Comprehensive Measures for Minimizing the Impact of COVID-19 and Early Overcoming for Livelihood and Economy.'

Following previously announced support measures totaling 4 trillion won, including contingency funds for quarantine response (109.2 billion won), local government contingency funds (162.2 billion won), and new policy financing supply for small business owners (2 trillion won), the administration (about 7 trillion won) and public and financial institutions (about 9 trillion won) presented additional support measures totaling approximately 16 trillion won. The confirmed fiscal scale now reaches 20 trillion won.

To revive domestic demand, the government will temporarily reduce the individual consumption tax by 70% on all passenger car purchases from March to June. The maximum reduction limit is 1 million won. The income deduction rate for credit and debit card usage during March to June will also be doubled from the existing rate. In particular, to promote consumption in various fields such as jobs, vacations, culture, tourism, and childbirth, a '5 Major Consumption Coupon' system will be introduced.

Special financial support will be expanded, including increasing ultra-low interest loans for small business owners from the current 1.2 trillion won to 3.2 trillion won. Additionally, value-added tax payments for small individual business owners with annual sales under 60 million won will be reduced to the simplified taxpayer level until the end of 2021.

Efforts will also focus on helping small business owners and SMEs recover from damages. Following Deputy Prime Minister Hong's announcement of support for 'Good Landlords' the previous day, ultra-low interest loans for small business owners will be expanded from the existing 1.2 trillion won to about 3.2 trillion won, and guarantee fees will be reduced from 0.8% to 0.5% for one year. Special guarantees by regional credit guarantee foundations will be expanded more than tenfold to 1 trillion won, and guarantee rates will be lowered from 1.0% to 0.8%. To support SMEs that find it difficult to issue corporate bonds alone, the issuance scale of bond collateralized securities (P-CBO) will be increased and repayment burdens reduced. Management stabilization fund loans for affected SMEs will increase twentyfold to 630 billion won, and loan interest rates will be lowered by 0.5 percentage points to 2.15%.

By industry, a 50 billion won unsecured credit guarantee special loan will be newly established for the tourism sector, with an additional 80 billion won in general loans. Emergency loans of up to 300 billion won will be provided to low-cost carriers (LCCs), and a public guarantee program for airline operating leases will be introduced. Furthermore, tax burdens for small individual business owners with annual sales under 60 billion won will be reduced, and support will be provided for tax and customs clearance for small business owners and SMEs, early and advance payment of insurance premiums for industries severely affected by COVID-19, deferral and reduction of various usage fees, and reemployment programs for retired personnel.

Due to the impact of the novel coronavirus infection, consumer sentiment is shrinking, and on the 28th, Gwangjang Market in Jongno-gu, Seoul, is showing a quiet scene. Photo by Jinhyung Kang aymsdream@

◆ Supplementary budget exceeding 6.2 trillion won to be announced next week... "Continuous consideration of 4th and 5th support measures" = According to the Ministry of Economy and Finance, the supplementary budget related to COVID-19 to be submitted to the National Assembly next month is expected to exceed 6.2 trillion won. Deputy Prime Minister Hong said on the day, "It is difficult to specify the exact amount as we are currently discovering and reviewing supplementary budget projects," but added, "Considering the more serious situation compared to the MERS outbreak, the expenditure scale should be larger than that of the Middle East Respiratory Syndrome (MERS) period."

Regarding growth rate forecasts related to COVID-19 and the supplementary budget, he said, "The government does not adjust growth rates like research institutions depending on the issue, but will adjust them in the economic policy direction for the second half of the year in July," adding, "Including the supplementary budget scale, the total support measures will exceed 26 trillion won, and I believe this will help maintain momentum for economic recovery."

On the day, the Ministry of Economy and Finance also announced a goal to execute more than 75% of the planned supplementary budget within two months after its passage in the National Assembly. The supplementary budget will focus on ▲supporting recovery of small businesses and SMEs ▲advancing the quarantine system ▲strengthening the economy (domestic demand and regional economy), and efforts will be made to ensure that more than 75% of the supplementary budget is executed within two months after approval to quickly realize its effects.

In the first half of the year, central government finances will be executed early at a record high level of 62%, with more than 32% executed in the first quarter. In particular, job projects will be executed early at 66% in the first half and more than 37% in the first quarter.

◆ Recovery momentum already faltering despite limited reflection of impact = The economic recovery momentum weakened from January this year, before the full impact of COVID-19 was reflected. According to the 'January 2020 Industrial Activity Trends' released by Statistics Korea on the 28th, retail sales in January decreased by 3.1% compared to the previous month due to reduced sales of passenger cars, shoes, bags, and cosmetics. This was the largest decline in 8 years and 11 months since February 2011, when it recorded -7.0%.

Facility investment decreased by 6.6% compared to the previous month, with investments in machinery such as special industrial machinery (-6.0%) and transportation equipment such as automobiles (-8.0%) both declining. Domestic machinery orders increased by 24.0% year-on-year, rising in private sectors such as electronic components, computers, audiovisual communication, and public sectors including others. Construction performance also increased by 3.3% compared to the previous month, with both building (3.0%) and civil engineering (4.0%) construction results rising. Total industrial production increased by 0.1% compared to the previous month, as production rose in services and construction despite a decline in manufacturing.

The coincident index cyclical component rose by 0.3 points month-on-month, as construction performance and service production indices increased despite a decrease in retail sales index. The leading index cyclical component rose by 0.1 points month-on-month, as increases in the KOSPI and economic sentiment indices offset decreases in export-import price ratio and construction orders.

Regarding this, Director Ahn explained, "With the index rising for two consecutive months, the indicators show that the economic recovery momentum continued last month," but added, "However, the limited reflection of COVID-19 is a limitation, and it has become difficult to judge the future economy based solely on the indices." He also forecasted, "The impact of COVID-19 on overall retail sales and investment was not fixed in January and will be reflected in February. February will be a difficult situation for economic recovery and will constrain the recovery trend."

However, looking at the statistical trends during the Middle East Respiratory Syndrome (MERS) outbreak in 2015 in Korea, it was explained that when a disease-related adverse event occurs, indicators worsen in a short period but recovery does not take long once the outbreak ends. Director Ahn said, "The impact appeared immediately after the outbreak, and a rebound was observed as soon as it was resolved," adding, "The economic impact continued for about one and a half months after the last patient occurred (July 5, 2015)."