[Exclusive] Local Government Investments Blocked by COVID-19... Local Fiscal Execution Rate Plummets

Local Fiscal Rapid Execution Stalls at 40%
Execution Rate of Large SOC Budgets Drops Significantly
Minus Growth Rate Expected if Execution Delays Persist

[Asia Economy Reporter Jang Sehee] "Everyone is struggling due to the novel coronavirus infection (COVID-19), but they are telling us to execute projects that should be completed within a year in just six months. Except for one-off projects, it is realistically difficult to carry out the budget." (An official from a local government budget office)

As the government anticipates a prolonged economic downturn due to the COVID-19 crisis, it is emphasizing an expansionary fiscal role and accelerating rapid budget execution. However, in metropolitan cities and provinces nationwide, various event cancellations and construction delays are causing setbacks in domestic demand and investment-related projects. The government plans to maximize growth rates through fiscal spending, but there are concerns that the government's contribution has limits in offsetting the decline in Gross Domestic Product (GDP) growth.

On the 25th, Asia Economy analyzed the "Local Fiscal Rapid Execution Rate Data" obtained from 17 metropolitan cities and provinces, finding that the nationwide average rapid execution rate (as of May 18) was only 46.33%. Specifically, by local government, the execution rates were ▲Gyeongnam 47.09% ▲Chungbuk 45.65% ▲Gangwon 43.45% ▲Seoul 42.13% ▲Sejong 41.75%. Among the 17 metropolitan cities and provinces, only three exceeded 50%: Busan (55.76%), Gwangju (50.75%), and Gyeonggi (50.17%). Even Jeju's execution rate (36.50%) dropped by 3 percentage points compared to the same period last year. Although the government pledged to execute 60% of local fiscal budgets in the first half of the year to revitalize regional economies, with less than two months remaining, it is realistically difficult for local governments to raise execution rates by more than 10%. Especially, the execution rate in the social overhead capital (SOC) sector, which has a large budget, has significantly declined due to COVID-19, resulting in poor performance. An official from the Ministry of the Interior and Safety said, "Most projects have been disrupted by COVID-19, making actual execution difficult."

As unprecedented COVID-19 crisis forecasts make positive growth this year unlikely, the government is emphasizing fiscal execution more than ever. On the 15th, Ahn Il-hwan, the 2nd Vice Minister of Strategy and Finance, stated, "To maximize fiscal outcomes within limited resources, selection and concentration are important," and added, "Please ensure that resources are intensively invested in projects with significant economic ripple effects." However, if fiscal execution does not accelerate, annual growth is expected to record a negative figure. In fact, South Korea's GDP growth rate in the first quarter of this year was -1.4%, with private and government contributions at -1.5 percentage points and 0.2 percentage points, respectively.