S Korea Fine-Tunes Economy To Combat Deficit

Han Seung-soo proposed cutting utility charges by 5-10 per cent, freezing most public service pay and making it easier for local companies to tap cheaper funding overseas.

At the same time, the finance ministry announced that starting on October 1 it would raise the ceiling for total foreign investment in South Korean listed shares to 20 per cent from the current 18 per cent.

Foreign investors also would be given direct access to over-the-counter stocks, a finance ministry statement said, without giving a timetable. Access is now through funds.

We are taking a very careful approach to the economy. This is neither a cooling-off or an expansionary policy, Han told a news conference. We are fine-tuning.

 

Economists point out that the current account deficit is largely due to factors out of South Korea's control, notably plunging international prices for semiconductors, steel and petrochemical products.

This, plus brisk consumption, drove the defict to $11.6 billion in the first seven months against $6.5 billion a year earlier. August's trade gap hit a monthly record $2.9 billion against a $901 million shortfall a year earlier.

We are not going to rely on short-term, quick-fix policies to redress current problems because these would worsen the situation, the ministry statement said.

The government would crack down on excessive consumption by, for instance, running tax audits on individuals and companies suspected of lavish spending.

Soaring consumption is now becoming a headache for the country's economy, the statement said.

The measures on wages and prices, plus moves to curb spending, amount more to government guidelines rather than policy directives.

The government is indicating the direction of policy, an approach that has been pretty effective in the past, said Shim Sang-dal, a former senior finance ministry adviser.

Double-digit wage rises have far outstripped growth in industrial productivity. Together with restrictive labour laws that make lay-offs virtually impossible, this has eroded Korea's international competitiveness.

Han said the government aimed to keep overall wage increases within single digits next year. The finance ministry gave no details of how it would liberalise overseas' debt issues by local companies, which have been forced to borrow funds instead of relying on internal resources because of slumping exports.

Average bank interest rates for corporate borrowers last year were 13.8 per cent.

The statement reiterated previous plans to encourage savings by offering tax breaks on long-term bank interest earnings and securities house investment accounts.

It pledged more investment in infrastructure to reduce transport costs, one of the greatest burdens on industry, and promised to smooth out agricultural prices by, for instance, releasing government rice stocks to ease shortages.

Farm goods account for about 30 per cent of the consumer price index, the leading indicator of inflation which rose a year-on-year 5.3 per cent in August compared with a government target for the year of 4.5 per cent.

The stock market, which has plunged by 20 per cent since April on jitters over the economic outlook, was unimpressed by the package. The index fell 4.46 points to end at 769.80.