South Korea unveils $14 bn stimulus package to spur growth

Seoul (AFP) - South Korea on Thursday announced a $14 billion stimulus package to boost its troubled economy, hammered by the deadly MERS outbreak which has dented consumer spending and business sentiment.

In announcing the 15 trillion won programme -- which follows a central bank interest rate cut to a record low this month -- the finance ministry also slashed its growth outlook for this year.

Finance Minister Choi Kyung-Hwan said the extra move was crucial as a recovery in Asia's fourth largest economy hinged on efforts to quickly contain the effects of Middle East Respiratory Syndrome.

As of Thursday the virus had killed 29 people and infected 151 since the first case was confirmed on May 20, making it the worst outbreak outside Saudi Arabia.

"We can say that we have overcome the MERS crisis only if our economy rebounds," Choi said, warning that growth could come in below 3.0 percent without support from the extra spending.

"The economy is being weighed down by MERS, which has seriously hurt consumption and the service sector," he said, adding the government would use all available resources to prop up growth, support exports and create jobs.

Choi said the government would issue bonds to fund the extra budget, the size of which will be decided after analysing the impact of MERS.

The finance ministry slashed its growth forecast for this year to 3.1 percent from an earlier projection of 3.8 percent.

The ministry said the MERS outbreak could pare up to 0.3 percentage point off annual economic growth, vowing to keep close tabs on rising household debt and encourage corporate restructuring that could reduce risks to the economy.

The slowing global economic recovery and a weak yen and euro are other risks to South Korea, it said.

As part of the package provincial authorities will be encouraged to spend more on infrastructure projects, while it will also be used to help contain MERS, address the effects of a severe drought and create more jobs.

"We’re trying to cope with shocks from non-economic issues by boosting fiscal spending sufficiently and keeping it expansionary," said Lee Chan Woo, a director general at the ministry.

"This supplementary budget is to offset the effect of MERS, the drought, and to help low-income earners."

- Interest rates cut -

The central Bank of Korea cut interest rates this month to a record low 1.5 percent as businesses including shops, restaurants and cinemas reported a slump in sales.

South Korea's exports fell 10.9 percent from a year earlier in May, shrinking for the fifth consecutive month.

The ministry forecast this year's exports would fall 1.5 percent from a year ago. It also lowered its inflation outlook to 0.7 percent.

South Korea's benchmark KOSPI failed to get a boost from the government's announcement and fell 0.02 percent to 2,085.06 Thursday with sentiment weakened by stalled talks on a Greek bailout.

On Thursday the health ministry reported two more deaths from MERS and one more new case of the disease.

The two fatalities included a 65-year-old man who contracted the virus at a hospital at the central city of Daejon. He was diagnosed on June 6.

The other was a 70-year-old woman who was a relative of another infected patient. She was diagnosed on June 22.