South Korea drafts $13.38 billion extra budget to help businesses

South Korea is drafting an extra budget of 15 trillion won ($13.38 billion), it said on Tuesday, to boost support for small businesses and safeguard jobs as the resurgent coronavirus forces the government to retain social distancing curbs and other measures.

The finance ministry said total government spending would increase to a record 573.0 trillion won this year, up 11.9% from last year, while expected tax revenue is seen growing just 0.3%.

That is set to worsen the debt-to-GDP ratio by 8.4 percentage points to a record 48.2% in 2021, versus 43.9% last year.

“We want to make sure there are no blind spots left when it comes to using support funds (for small businesses), compared to how we spent them before,” Ahn Do Geol, the deputy finance minister for the budget, told a news conference.

The left-leaning government has urged conglomerates to share some of their profits with smaller businesses that have borne the brunt of the pandemic while big exporters enjoyed a rapid recovery in earnings.

On Friday, the government said it would extend social distancing rules for two weeks nationwide, including a ban on private gatherings of more than four, to blunt the virus spread.

The COVID-19 inoculation campaign kicked off the same day was the first step towards an ambitious goal of herd immunity by November.

The spending unveiled on Tuesday adds to pandemic-fighting stimulus of about 310 trillion won since last year, when the economy shrank 1.0%, the most since 1998.

Beside the extra budget funds, 4.5 trillion won will be allocated towards job-keeping funds and childcare subsidies from the existing budget.

More than half the extra budget will provide cash handouts to mom-and-pop stores and people laid off, while another 4.1 trillion won will go to virus treatment facilities and vaccine purchases.

To finance the extra stimulus, the finance ministry will step up treasury bond issuance by 9.9 trillion won and rework other spending plans to make up the rest, it said.

South Korea’s factory activity expanded at its fastest pace in nearly 11 years in February, a private survey showed on Tuesday, as the strongest growth in over a decade in production and new orders drove the recovery in the manufacturing-heavy economy.

The IHS Markit purchasing managers’ index (PMI) jumped to 55.3 in February from 53.2 in January, marking the strongest level since April 2010 when it stood at 57.1. The 50-mark threshold separates growth from contraction.

“Both output and new orders expanded at the fastest pace in close to 11 years in the latest survey period as manufacturers reported increasing demand and new product development had boosted the overall health of the sector,” said Usamah Bhatti, economist at IHS Markit.

The sub-index for output stood at 57.2, marking the sixth straight month of expansion and the sharpest increase since April 2010. New orders also grew the most since April 2010, while new export orders extended growth to a fifth month albeit at a softer pace from a month earlier.

Respondents largely attributed the improvement to higher domestic demand at home and in Southeast Asian markets. The increased new business also helped to stabilise employment levels last month, the survey showed.

Looking ahead, businesses were solidly optimistic in February with confidence surging to its highest in eight years.

“IHS Markit currently estimates industrial production to grow 1.4% in 2021, with expectations for it to be a key contributor to economic growth in South Korea,” Bhatti said.

The Bank of Korea (BOK) currently sees the economy expanding 3.0% and 2.5%, respectively, for this year and next.

South Korean shares stood out from Asia’s emerging markets on Tuesday with a 1.5% jump after exports and factory activity data reinforced hopes for an economic recovery.

Shares in Seoul came off their highs by the afternoon, having made a strong start on their re-opening after being closed for a public holiday on Monday. Taiwan, which was closed on Monday too, also gained over 1%. The rest of the region edged higher while currencies stuck to tight ranges against a firmer dollar as the U.S. economic recovery shows further signs of strength with growing optimism about the passage of a COVID-19 relief package.

Factory activity in South Korea expanded at its fastest pace in nearly 11 years in February, while exports expanded for a fourth straight month underpinning momentum for the trade-reliant economy, Asia’s fourth-largest.

A spike in US Treasury yields over the last month on the back of higher inflation expectations and the possible end to cheap money has unsettled investors at a delicate phase in the global recovery. “Sentiment may remain choppy as the market continues to digest the higher US Treasury yield environment,” analysts at OCBC said.