South Korea sees stronger growth, pledges to support sectors hit by high interest rates

SEOUL: South Korea’s government on Wednesday pledged support for small businesses and the construction sector struggling with high interest rates in the second half of 2024, while also revising upward its forecast for this year’s economic growth.

“Small businesses continue to face a difficult situation. Faced with persistently high interest rates, their interest burden has increased, while wage and rent costs are also rising,” President Yoon Suk Yeol said in a speech ahead of the government’s two-year economic policy announcement.

The government has prepared support measures worth a total of 25 trillion won ($18 billion), Yoon said.

In its two-year economic policy program, the finance ministry forecast the economy would grow by 2.6% in 2024, up from 2.2% in January. The economy grew by 1.4% in 2023, the lowest level in three years.

Economic growth will be driven by exports, particularly semiconductors, amid growing demand from artificial intelligence, the ministry said. Economic growth was forecast at 2.2 percent in 2025.

The ministry said the government would provide small businesses and the self-employed with loans with longer repayment periods and lower interest rates, while also taking steps to reduce fixed costs such as rent and utilities.

The government will increase financial support for small businesses by 1 trillion won ($721.8 million) in the second half of the year to help them cover utility costs, interest and salaries, it added.

On inflation, the ministry maintained its forecast for this year at 2.6% and said it expected consumer prices to grow at a slower rate of 2.1% in 2025. It had not previously provided a forecast for 2025.

South Korea’s central bank extended its monetary policy pause for an 11th straight meeting in May, keeping interest rates at a 15-year high while reiterating its warning about inflation risks.

Asia’s fourth-largest economy grew at its fastest pace in two years in the first quarter, helped by strong exports. But there are concerns the recovery could be uneven as high interest rates squeeze domestic demand.

To revive the lagging construction sector, the ministry said it would boost public sector investment, infrastructure projects and policy financing by 15 trillion won more than previously planned in the second half of the year.

At the same time, it will continue to take steps to manage liquidity risks related to real estate project financing to ensure they do not spill over into broader financial markets.

The ministry also said it would prepare tax breaks to complement the government’s ongoing corporate reform aimed at boosting the domestic stock market – the “Enterprise Value Growth Program”.

The bill would provide tax relief on corporate income for capital gains increases for shareholders, introduce separate taxes on dividend income paid to shareholders at rates lower than other financial income, and make changes to inheritance taxes to make them less burdensome for family businesses.

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