Gov’t adds $4.9 billion to low-cost loan fund for SMEs

Finance Minister Hyun Oh-seok, second from left, making a speech before the government’s meeting to discuss help on small and midsize companies at the government complex in central Seoul yesterday. [NEWSIS]

Korea will increase financial and tax support to help small and midsize companies boost investment as they face headwinds from slower growth in China and a weak yen.

The government will make available an additional 5.3 trillion won ($4.9 billion) in low-interest loans this year through policy banks such as Korea Development Bank, the Finance Ministry said in a statement yesterday.

Tax support to shorten the time that companies can recoup their investments will also be offered. Other steps to boost capital expenditure are planned at the end of this month, said Finance Minister Hyun Oh-seok.

The measures come as President Park Geun-hye tries to meet a 2.7 percent growth target for 2013 as a 23 percent decline in the yen against the won over the past year and a slowdown in China weigh on demand for Korean exports.

The government introduced a 17.3 trillion won supplementary budget in May and the central bank cut interest rates as record household debt and a sluggish housing market restrained consumption.

“The biggest obstacle for smaller companies is uncertainty over consumer spending and the global recovery,” said Lee Sang-jae, a Seoul-based economist at Hyundai Securities “What the government needs to do in follow-up measures later this month is to review housing-market rules to make sure that a revival in the property market supports the domestic economy.”

The recovery in the private sector “remains weak,” said Hyun. “We will strengthen policy measures so the recent recovery momentum can be passed on to the private sector and spur corporate investment.”

A slowdown in investment spending prompted President Park to consult with heads of big Korean businesses last month on possible regulatory changes that would help create jobs and boost wages.

Facility investment by Korean companies fell 1.9 percent in 2012 after a 3.6 percent increase in 2011. The central bank projects a 1.8 percent increase this year, according to a July statement.

China’s economy will expand 7.5 percent this year, the slowest pace since 1990, according to the median forecast of analysts surveyed.

Gross domestic product expanded 1.1 percent in the second quarter from the preceding three months, the most in more than two years, Bank of Korea data showed Sept. 5. The economy will expand 2.8 percent in 2013 and 4 percent next year, which would be the fastest since 2010, the central bank forecasts.

The BOK last week left its benchmark interest rate unchanged at 2.5 percent for a fourth straight month citing lingering uncertainties in overseas markets including the ending of the U.S. asset purchase program. The Federal Reserve Board will be holding its meeting this week.

Meanwhile the Finance Minister in meeting with reporters late Monday said he will consider of raising taxes if the government fails to secure the needed tax amount from tracking down underground economies including tax dodging and reduction on tax returns.

The comment was made after President Park, in holding three-party talks at the Blue House on Monday with heads of both the ruling and opposition parties, hinted at the possibility of raising taxes. It was her first mention of a tax increase since taking office in February.

“It is obvious that a reduction in tax benefits and refunds will automatically increase tax collection,” Hyun said. The government has decided to cut down on tax benefits and refunds of roughly 18 trillion won in the next five years.

The finance minister stressed his confidence that the National Tax Service will secure 27 trillion won from the underground economy.

He said Hyun that once the financial intelligence unit allows greater access to a person’s financial transaction information starting in November, the NTS will have it easier in tracking down such tax evasion.

Intelligence unit access has been limited to financial authorities and did not include the tax agency.

“This year there hasn’t been a single case that used the financial intelligence unit, but starting next year there will be,” Hyun said. He did stress that although the government will do its best to secure a sound fiscal situation, it will not increase taxes while ignoring everything else, including the economy.

BY lee ho-jeong, bloomberg [ojlee82@joongang.co.kr]