More Signs of Panic by the South Korean Government: 11 trillion won (US$9.64 billion) of Fiscal Stimulus Launched!

Some key Asian governments have truly been in panic.

South Korea’s central bank just slashed interest rates only last June.

Now they are doubling down by supplementing fiscal stimulus to monetary policy.

In a way this would seem like a trial balloon towards “helicopter money”

From Yon Hap news (July 22)

South Korea on Friday outlined an 11 trillion won (US$9.64 billion) extra budget plan designed to prop up its economy facing sluggish exports and a possible fallout from corporate restructuring in key industries.

It is part of the government's 28 trillion won economic stimulus package aimed at helping Asia's fourth-largest economy achieve 2.8 percent growth this year, which was downgraded last month from an earlier 3.1 percent.

What the government will spend on…

According to the ministry, the proposed 11 trillion won extra budget plan showed that 9.8 trillion won will be used to stimulate the economy, with the remaining 1.2 trillion won to go to pay back the state debts. (bold mine)

Out of the 9.8 trillion won fiscal program, 1.9 trillion won will be set aside to support the corporate restructuring efforts and another 1.9 trillion won will be spent to create jobs and boost the real economy. Some 2.3 trillion won will be injected into the shipyard cluster areas to prevent a sudden economic slump, with 3.7 trillion won to finance local provincial government budgets.

As part of the program, the government will send out orders for 61 vessels such as patrol boats and warships in order to help small and medium-sized shipbuilders survive, while it will pour out an additional 400 billion won in public credit guarantee funds to ease their cash flow problems.

It also includes a plan to increase the foreign exchange stabilization fund by 500 billion won to get prepared preemptively against possible financial turmoil in the aftermath of the Brexit.

Separate from the supplementary budget, at the same time, the government said it will spend an additional 17 trillion won to increase investments and foster domestic demand by encouraging state-run companies to make large-scale investments and expand state-run trade funds.

So South Korean government's picking of winners will include the defense industry and their favored private sector suppliers, partial bail out of the shipping industry, subsidies to state owned enterprises, lending to select private and public corporations, as well as, paying back local debts.

With a total of 28 trillion won in increased fiscal spending, the government forecast that it will likely push up economic growth by 0.1 and 0.2 percentage point this year and create 68,000 new jobs.

Yet all these are all nothing but rose colored assumptions that are truly bandaid therapy.

They don’t deal with the real cause of the South Korean economy’s lethargy: strained debt plagued balance sheets!

Yet the South Korean government sees free lunch from the crony based stimulus

The finance ministry added that the proposed extra budget will decrease the country's debt-to-gross-domestic-product ratio to 39.3 percent from the current 40.1 percent, as it will be financed with a tax surplus and others, without selling state bonds.

Really?

The public sector's balance sheet has already seen ballooning deficits, which have been funded by swelling debt.

And yet the ironic thought that the new set of fiscal spending will be funded from tax financed surpluses?  Or the South Korean government believes that (government) consumption spending will produce economic value added surpluses or free lunches!

Sad to see how present government policies worldwide have all been anchored on hope pillared on false reality.

Don’t worry be happy, stocks will continue to rally premised on the free lunch miracles!