Support to small businesses: South Korea's government pledged on Wednesday to support small businesses and the construction sector struggling with high interest rates in the latter half of 2024 as it upgraded its economic growth forecast.

President Yoon Suk Yeol, in a speech preceding the government's biannual economic policy announcement, acknowledged the challenges faced by small businesses. "Amid persistently high interest rates, their interest burden has increased, while wage and rent costs are also rising," Yoon stated.

The government has allocated 25 trillion won ($18 billion) in support measures, Yoon revealed.

In its updated economic policy agenda, the finance ministry projected the economy to grow by 2.6 per cent in 2024, up from the 2.2 per cent forecast in January. The economy expanded by a three-year low of 1.4 per cent in 2023.

Economic growth will be driven by exports, especially semiconductors, amid rising demand from the artificial intelligence sector, the ministry noted. The ministry also forecasted a 2.2 per cent growth rate for 2025.

To assist small businesses and the self-employed, the government will offer policy loans with extended repayment periods and lower interest rates. Additionally, measures to reduce fixed costs, such as rents and utility fees, will be implemented. Financial support for small businesses will increase by 1 trillion won ($721.8 million) in the second half to help cover utility costs, interest, and wages.

The ministry maintained its 2024 inflation forecast at 2.6 per cent and anticipated a slower rise in consumer prices, at 2.1 per cent, in 2025.

The central bank held interest rates steady at a 15-year high for the 11th consecutive meeting in May, stressing inflationary risks.

South Korea's economy, Asia's fourth-largest, grew at its fastest pace in two years during the first quarter, driven by robust exports. However, high interest rates have raised concerns about an uneven recovery by squeezing domestic demand.

To revive the construction sector, the ministry will expand public-sector investments, infrastructure projects, and policy financing by an additional 15 trillion won. Efforts will also be made to manage liquidity risks related to real estate project financing to prevent broader financial market disruptions.

The ministry plans to introduce tax benefits to support corporate reforms aimed at boosting the domestic stock market. These include tax exemptions on corporate income for capital returns to shareholders, lower tax rates on dividend income, and less burdensome inheritance taxes for family-run companies.

(with Reuters inputs)

South Korea vows support for small businesses amid high rates

The government has allocated 25 trillion won ($18 billion) in support measures.

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