The Korean government is expected to announce a plan for a supplementary budget this month, to be included in the second-half economic policy guidelines. Monetary easing through the BoK rate cut and fiscal easing through a supplementary budget would make for a perfect policy mix to address the downside risks associated with MERS. The objections from the opposition party, the main reason why the government has been hesitant towards the idea of a supplementary budget, should no longer be a problem. Concerns on MERS have clearly made the opposition party more supportive of fiscal easing.
The supplementary budget will no doubt feature a downside revision to the revenue target, which was the main reason why a supplementary budget is anticipated even before the MERS outbreak, says Societe Generale. The magnitude of fiscal easing, however, will almost certainly be larger than the originally envisaged.
"Previously we assumed a modest reduction in the spending target and a balanced budget in terms of the consolidated fiscal balance. But now a modest increase is expected in fiscal spending and a slight deficit in the fiscal balance", added Societe Generale.
