Bloomberg News

South Korea Plans Deficit Cut as Europe Debt Crisis Lingers

September 26, 2011

(Updates with consumer sentiment data in ninth paragraph.)

Sept. 27 (Bloomberg) -- South Korea’s government plans to cut its fiscal deficit next year as the European sovereign debt crisis underscored the need for global policy makers to control their borrowing.

Total spending will rise 5.5 percent to 326.1 trillion won ($273 billion), while tax revenue will gain 9.5 percent to 344.1 trillion won, the Ministry of Strategy and Finance said in its budget proposal for 2012 released today. The government’s deficit will shrink to 14.3 trillion won, or 1 percent of gross domestic product in 2012, from 25 trillion won, or 2 percent this year, according to its calculations.

European shares gained yesterday on speculation officials will intensify their attempt to contain a debt crisis that threatens to send Greece into default. South Korea’s government said it aims to balance the budget in 2013 and post a surplus equivalent to 0.3 percent of the economy by 2015.

“The European debt crisis shows what will happen if fiscal debt gets out of control,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. “The government wants to improve its fiscal standing rather than boosting the economy through stimulus measures.”

The won rose 1.2 percent to 1,178.71 per dollar as of 10:34 a.m. in Seoul, according to data compiled by Bloomberg. The Kospi stock index gained 3.5 percent. South Korea’s three-year bonds advanced, with the yield on the 3.5 percent debt falling two basis points, or 0.02 percentage point, to 3.47 percent, Korea Exchange Inc. prices show.

’Systemic Risk’

“A big worry now is that the current situation would not be just limited to a fiscal crisis in a couple of countries, but likely lead to a systemic risk to the overall global economy,” Finance Minister Bahk Jae Wan said in a statement for the annual meetings of the International Monetary Fund and World Bank in Washington on Sept. 23.

South Korea also needs to cut its borrowings to grapple with a fast-aging society and low birth rate, the ministry said. National debt will be 32.8 percent of GDP next year, compared with an estimated 35.1 percent this year, it said.

The nation’s economy will grow at an annual pace of about mid-4 percent between 2011 and 2015, the ministry said. The IMF cut its forecast for South Korea’s GDP to 4 percent expansion from 4.5 percent for this year on Sept. 20. The economy grew 3.4 percent in the second quarter from a year earlier, the slowest pace in seven quarters.

Consumer Confidence

Reflecting South Korean consumers’ concern that the nation’s economic outlook may worsen, consumer confidence in September stayed at the lowest level since March, according to a Bank of Korea report released today.

Welfare expenditures will increase 6.4 percent, education outlays will rise 9.3 percent and defense spending will gain 5.6 percent next year, according to the ministry’s proposed budget. Infrastructure outlays will decline 7.3 percent.

The government expects about 900 billion won in revenue from selling part of its stake in Korea Development Bank and around 1 trillion won from the sale of Industrial Bank of Korea shares next year, the finance ministry said in a separate statement today. It also plans to sell about 400 billion won worth of its share in Incheon International Airport Corp.

The calculation of the fiscal deficit excludes state social security funds.

--Editors: Ken McCallum, John Brinsley

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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