SEOUL (Reuters) -South Korea’s government proposed on Friday a supplementary 12.2 trillion won ($8.60 billion) budget to counter heightening risks to economic growth in the face of a global trade war and domestic political uncertainty.
The budget plan comes as South Korea earlier this month prepared support packages for its auto and chip sectors, which have powered the trade-reliant economy’s rising exports to the United States in recent years and are now bracing for the impact of U.S. tariffs.
“There are concerns about some companies struggling with liquidity difficulties due to the global trade conflict sparked by U.S. tariffs and a delayed recovery in domestic demand,” Acting President Han Duck-soo said in his remarks at a cabinet meeting, noting worries that it might lead to a broader financial market squeeze.
Reflecting “significant” risks from U.S. President Donald Trump’s tariff policy, the Bank of Korea signalled it would cut interest rates in May and left the door open to further monetary easing, after holding rates steady on Thursday.
The central bank said there was a high downside risk to its growth forecast of 1.5% for this year and a possibility that the economy contracted in the first quarter. It estimated the proposed extra budget would boost growth by 0.1 percentage point.
Of the total new spending of 12.2 trillion won, 8.1 trillion will be financed by issuing additional government bonds, the finance ministry said.
The budget plan includes 2.1 trillion won for responses to trade risks and 1.8 trillion won to boost the country’s artificial intelligence industry.
It also includes 4.3 trillion won worth of financial support measures for small businesses and 3.2 trillion won for natural disaster responses, after the country suffered recent wildfires that were the worst on record.
The extra budget will raise the country’s fiscal deficit to 3.2% of gross domestic product (GDP) this year, from 2.8%, and government debt to 48.4% of GDP, from 48.1%.
The ministry also plans to raise the ceiling of foreign exchange stabilisation bond sales in foreign currencies to $3.5 billion this year, up from the previous $1.2 billion, to be prepared when market volatility heightens, while lowering the ceiling of won-denominated bond issuance by the same amount.
In December, South Korea’s opposition-controlled parliament passed a government budget for this year that slashed the government’s proposal.
The refusal by the opposition to pass the proposed budget in full was one of the reasons that former President Yoon Suk Yeol gave for his shock decision to declare martial law, which triggered South Korea’s worst constitutional crisis in decades.
Yoon was removed from office this month after being impeached and a presidential election will be held on June 3.
The latest budget proposal is also subject to approval by parliament, controlled by the left-leaning Democratic Party, which has recently argued for a much bigger supplementary budget of 35 trillion won.
($1 = 1,422.0000 won)
(Reporting by Ju-min Park, Jihoon Lee; Editing by Christian Schmollinger and Shri Navaratnam)
