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S.Korean economic package to focus on investment

By Kim Myong-hwan

SEOUL, March 26 (Reuters) - A package of economic steps South Korea is due to unveil on Thursday to help shield the economy from external risks will focus on propping up capital investment, finance ministry officials said on Wednesday.

The ministry has said economic growth of around five to six percent is possible this year if strong exports, underpinned by brisk investment, can plug a gap left by depressed domestic demand. Analysts are not so sure that will be enough.

Despite growing calls for a more drastic stimulus package, Finance Minister Kim Jin-pyo has said a rate cut or other overt pump-priming measures are not among his cards because such actions could entail many unwelcome side effects.

"Our economic plans, (to be disclosed on Thursday), will be in line with what we have said so far," Bahk Byong-won, director-general of the ministry's economic policy division, told Reuters. "But they should be much more detailed."

South Korea's economic planners have been ordered to sharpen up policy plans by President Roh Moo-hyun, who is keen to calm investor nerves following recent financial market turmoil after the unearthing of a $1.2 billion corporate accounting scandal.

The arrest of ten executives of SK Global , the trading arm of South Korea's fourth-largest conglomerate SK Group, earlier in March sparked fears that Roh, who came to power on a platform of eradicating corruption at big business groups, know as "chaebol", would conduct a witch hunt against business.

"The message is Roh does not want to spook entire business sentiment with his purge pledge. That is the reason we are preparing a more detailed economic map," another ministry official told Reuters.

In an apparent bid to calm investors, Minister Kim has previously said that reforms would be conducted in a market-friendly way.

Family-owned chaebol, a sprawling cluster of business affiliates, contributed to the country's economic advance from the ashes of the 1950-53 Korean war, but their over-leveraged expansion was blamed for the 1997/98 financial crisis.

EASING RED TAPES

The new plan will propose corporate tax cuts, relaxation of rules prohibiting construction of industrial plants in city areas, and earlier implementation of public projects, ministry officials said.

It could also raise the threshold on the category of environmentally friendly mini-cars, which enjoy preferential tax treatments, from an engine capacity of 800-cc to 1,000-cc to encourage production.

"We know something should be done as the economy is weakening faster than we earlier thought," said the official, who declined to be identified. "For example, the government may want to advance more public projects in the first half."

The finance ministry has said it would spend about 53 percent of the 2003 state budget in the first half, up from 47 percent the same period last year.

Consumer confidence has fallen in recent months over worries about the nuclear ambitions of communist neighbour North Korea and a U.S.-led military campaign in Iraq.

On top of that, a package of measures the government implemented last October to curb a real estate bubble and excessive household debt has also hit consumer spending and corporate investment.