Korea takes extra stimulus step as Asian exporters seek relief

SEOUL Mon Sep 10, 2012 7:00am EDT

A truck is driven down a road at a yard where cars are parked before being exported at a port in Incheon, west of Seoul June 17, 2012. REUTERS/Choi Dae-woong

A truck is driven down a road at a yard where cars are parked before being exported at a port in Incheon, west of Seoul June 17, 2012.

Credit: Reuters/Choi Dae-woong

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SEOUL (Reuters) - South Korea announced an incremental stimulus package on Monday to nurse its export-driven economy through prolonged hard times, a move many Asian governments are expected to follow as Europe slides towards recession and the United States struggles to grow.

Unable to do anything about their shrinking external markets, regional policymakers are looking at bolstering the domestic side to ensure their economies have a soft-landing.

The $5.2 billion package trumpeted by Seoul was a follow-up to measures totaling $7 billion unveiled in late June. Together they are equal to about 1 percent of GDP for Asia's fourth largest economy, hardly enough to set pulses racing.

Taiwan, another exporter struggling against a drop in demand for high-tech gadgets, is expected to announce some investment incentives for the private sector on Tuesday, having notched a sixth straight month of contraction in exports in August.

As worrying as sliding growth rates may seem, most Asian economies are nowhere near the critical situations seen elsewhere in the world, and policymakers have been cautious about their next steps.

"The growth slowdown has been incremental and it's all being met with incremental policies," said Nigel Chalk, managing director of research for emerging Asia at Barclays.

"It seems like they probably would do more if it was a big negative shock but right now you don't see that, just a steady slowdown everywhere."

Everyone is waiting for some extra stimulus measures from China, after a flood of grim-looking data over the past two days has raised the clamor for something to be done to halt the world's second-largest economy's loss of momentum.

Despite two interest rate cuts in July and June, and fiscal easing undertaken earlier, there are rising fears that China could miss its official 7.5 percent growth target for this year. Even if the economy hit the target it would be the worst showing in at least 13 years.

With factories running at their slowest rate of expansion in more than three years, export growth of just 2.7 percent year-on-year in August and imports down 2.6 percent, it looks as if China is deep into a seventh straight quarter of slowing growth.

But any steps taken there are also likely to be incremental, rather than a blitz like the $630 billion stimulus Beijing unleashed in 2008/09, particularly with a once-a-decade Communist Party leadership change expected as early as next month.

Speaking at a summit of Asia-Pacific nations in Vladivostok on Sunday, President Hu Jintao trumpeted China's plans to pump $157 billion into infrastructure investments in agriculture, energy, railways and roads.

Barclays' Chalk said it was "very hard to interpret" China's stimulus announcements because of the lack of specifics on timing.

"It's not like it's all going to happen this year or in the next several months," he said. "They're getting used to the idea of lower growth and it seems to us a bit of a reluctance to do more, certainly not like they did in '08 and '09, just because that created its own domestic imbalances."

ROOM FOR MANOEUVRE

At least, when it needs to, China has the money to spend. The same can be said, albeit to a lesser degree, of many of the countries around the region.

"I think Asia is in a luxury that it's financially very strong, its financial system is sound," Hoe Ee Khor, assistant director of the Asia and Pacific Department at the International Monetary Fund, told Reuters last week.

"It doesn't have to over-react, and although growth has slowed down, unemployment is still very low and employment is holding up quite well. And inflation has come off. So you have got to strike the balance. In 2009 we were worried about a global recession. Here we are talking about a soft patch."

In the Philippines, where slumping exports and a slowing farm sector resulted in GDP growing just 0.2 percent in the second quarter from the first three months of the year, policymakers frontloaded government spending in the first half of the year and have stated their readiness to take further action to safeguard growth.

In Indonesia and Malaysia the picture was similar, with jumps in consumption accompanied by surging public and private investment.

Taiwan faces a more difficult situation.

The official GDP growth forecast has been cut eight times in the past year and some economists see danger of recession later this year.

Constrained by debt issuance limits, Taiwan would have difficulty funding a major stimulus and instead wants private firms to lead the way.

An official said the government would unveil a range of investment incentives, making it easier for firms to hire foreign labor and boosting the tourism industry.

But for some governments the most compelling reason to be seen doing something is political.

The official forecast for Korea's economic growth in 2012 is expected to be cut from 3 percent in October.

With a presidential election due in December, many analysts suspected the ruling party's main goal with the latest package was to sweeten the electorate with tax breaks worth 2.3 trillion won ($2 billion).

"I expect a lot of this is just pure politics, just trying to be seen to be doing something," said Erik Lueth, senior regional economist at Royal Bank of Scotland based in Hong Kong, adding that fiscally conservative Korean households would only spend a portion of the tax breaks.

Having cut interest rates for the first time in three years in July, the Bank of Korea is widely tipped to make another 25-basis-point cut at a policy meeting on Thursday.

"We expect both Korea and the Philippines to provide some monetary stimulus by lowering rates," said Chalk.

"In terms of fiscal stimulus and big packages, I'm not sure that we see much more on the horizon. It seems that Korea was just basically ensuring they spend what's in the budget this year."

(Reporting by Se Young Lee and Choonsik Yoo in Seoul, Faith Hung in Taipei and John O'Callaghan in Singapore; Writing by Simon Cameron-Moore; Editing by Alex Richardson)

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