Hong says economy might contract in the first quarter

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Hong says economy might contract in the first quarter

Finance Minister Hong Nam-ki for the first time said that the economy could contract on year in the first quarter of 2020.

On Friday during a meeting with the foreign press corps, Finance Minister Hong said he is not excluding the possibility of minus growth considering the impact of the coronavirus outbreak.

“Although it is inappropriate to say as a policymaker, it’s hard to exclude the possibility if you consider the impact on consumption, investment and exports both at home and abroad following Covid-19,” Hong said.

The finance minister until recently expressed confidence about the possibility of economic recovery. He cited improving indicators, including exports in February — which grew year-on-year for the first time in 15 months — and new jobs, exceeding 400,000 for three consecutive months since December.

As recently as three weeks ago, he dismissed the possibility of flat growth, though he did say that the annual GDP growth would be less than the 2.4 percent target.

During a National Assembly hearing on March 2, Hong said that the coronavirus outbreak could have a negative influence on overall economic growth this year, but he also noted that 0 percent growth was an “extreme” forecast.

“The overall consensus of the external institution is that the growth will be taken down by about 0.2 percentage points because of Covid-19,” Hong said. “There have been cases like the Organisation for Economic Cooperation and Development [OECD], which lowered Korea’s growth estimate to 2 percent.”

On Friday Hong said the economy will likely recover starting next year, citing international institutions including the International Monetary Fund and the OECD.

The finance minister also expressed his confidence in the $60 billion currency swap with the United States announced late Thursday.

“The fact that the currency swap is twice the size of the $30 billion 10 years ago was a huge help,” Hong said. “The Korean won against the dollar has eased, and the Kospi rose.”

However, he noted that the government is not letting its guard down as the market remains volatile.

“We are reviewing the possibility of additional action that the government can take other than the currency swap in stabilizing the foreign exchange market,” Hong said.

The finance minister said the government is looking into helping companies struggling to secure short-term foreign currency funding, including the possibility of tapping into the nation’s foreign reserve.

“While the government can’t just use it indiscriminately, we could think of various ways of supplying [foreign currency funding] to companies. The government has several funds which could contribute to stabilization mechanisms at the appropriate time,” Hong said.

When asked if Korea’s foreign reserves should be increased to $50 million, he stressed that the foreign reserves in the past decade have steadily increased from $30 million to now over $40 million.

“I believe the foreign reserves have increased within Korea’s economic capacity,” Hong said.

The finance minister said he wasn’t thrilled about the idea of giving disaster allowances to all Koreans regardless of their income, personal holdings or employment status, especially as he is responsible for fiscal management.

“I have told the National Assembly that I do not agree with the idea of giving every Korean disaster income,” Hong said. “And the said cash aid to targeted classes was already included in the current supplementary budget.”

He not only raised concerns about finding the financial resources for the disaster income but also the effectiveness of it.

Hong avoided answering questions on the possibility of a second supplementary budget, which the ruling Democratic Party has been pushing.

On Thursday, he took a step back from his previous stance, hinting about the government looking at all measures while reviewing fiscal resources.

On Friday, he stressed that the government support of the market is larger than the 11.7 trillion won ($9.4 billion) supplementary budget.

“When including the measures that the administrative body has taken, the total supplementary budget will be around 15 to 16 trillion won,” Hong said.

“These actions were taken internally in the administrative body when the National Assembly was pointing out that 11.7 trillion won was too small,” he added. “If the actions weren’t taken before, it might have been added in the March 5 supplementary budget proposal.”

The finance minister said the Korean government has requested to the Asian Development Bank to postpone its general meeting that was scheduled to take place in May to the second half of this year.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]
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