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SEOUL: South Korea Monday announced its largest-ever interest rate cut and urged legislators to approve big tax cuts and spending increases to shield the economy from the global financial crisis.
President Lee Myung-Bak said the country would not face a repeat of the 1997-1998 financial crisis, but stressed the need to bolster domestic demand to counter sluggish exports amid the global slowdown.
The Bank of Korea earlier reduced its key rate by 75 basis points to 4.25 per cent after a special meeting, the largest-ever one-day cut.
The meeting was called after the stock market last week suffered its biggest weekly decline and the won plunged to a 10-year low, amid fears the export-driven economy would be hit by the world's gloomier growth prospects.
Last Friday the central bank announced that the economy grew at its slowest pace for four years in the third quarter.
Bucking the regional trend, the stock market closed 0.8 per cent higher Monday thanks partly to the rate cut. The won fell further to end at at 1,442.5 won to the dollar, down 18.5 from Friday's close.
Central bank governor Lee Seong-Tae said the rate cut would help stem the economy's sharp slowdown and stabilise jittery markets.
"Domestic demand is faltering amid financial turmoil and exports will likely slow down. Under these circumstances, the central bank will be paying attention to those risks for the time being," he said, hinting at another rate cut in the future.
In a speech presenting the 2009 budget, Lee promised to provide unlimited liquidity in a "preemptive, sufficient, decisive" manner to calm local markets during a crisis "sweeping the entire world like a tsunami."
He highlighted the need to allay excessive fears, echoing US President Franklin D. Roosevelt's words during the Great Depression that "the only thing we have to fear is fear itself."
"Many people compare the current crisis with the foreign exchange crisis of a decade ago. I can say definitely, however, that there is no possibility of another financial crisis in Korea," Lee said.
The 1997-1998 crisis forced the nation to accept a humiliating 58 billion dollar bailout from the International Monetary Fund.
This time around, Lee said Asia's fourth largest economy -- with about 240 billion dollars in foreign reserves -- could overcome the foreign currency liquidity problem.
"Some raise a question about whether we can get over this crisis," he told MPs. "I will give you a crystal-clear answer. Yes, we can."
Lee told legislators the won, which has nosedived against the dollar this year, would stabilise significantly when the current account turns to surplus from the fourth quarter on falling oil prices.
He reconfirmed plans for tax cuts totalling 13 trillion won next year and a 7.2 per cent rise in budget spending to 209.2 trillion won. Increased spending would go largely to create jobs, expand growth capabilities and raise welfare spending.
Lee said the budget for supporting green growth and sustainable development would rise by almost 24 per cent, in line with his vision of a future economy based on "low-carbon green growth."
He said the salaries of all government staff would be frozen for the coming year to set an example, and called for wide-ranging deregulation to surmount the economic crisis.
The government would increase investment in social infrastructure and support for small and medium-sized enterprises and the service industry, which could create more jobs than other sectors.
"If we rise above this crisis appropriately, the Korean economy will make a great turnaround," Lee said.
- AFP/yb/ir
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