By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) -South Korea’s government on Wednesday vowed to support small businesses and the construction sector struggling due to high interest rates in the second half of 2024, as it revised up its forecast for this year’s economic growth.

“Small businesses are still in difficult conditions. Amid 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 bi-annual economic policy announcement.

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

In its biannual economic policy agenda, the finance ministry forecast the economy would grow 2.6% in 2024, up from 2.2% seen in January. In 2023, the economy expanded by a three-year low of 1.4%.

Economic growth will be led by exports, particularly of semiconductors, amid rising demand related to artificial intelligence, the ministry said. For 2025, it projected economic growth at 2.2%.

For small businesses and the self-employed, the government will provide policy loans with extended repayment periods and lower interest rates, while seeking policy measures to lower fixed costs, such as rents and utility fees, the ministry said.

The government will expand financial support for small businesses by 1 trillion won ($721.8 million) in the second half to help them pay utility costs, interests and wages, it added.

On inflation, the ministry kept its forecast for this year unchanged at 2.6% and said it expected consumer prices to rise more slowly, by 2.1%, in 2025. It had not previously provided a forecast for 2025.

South Korea’s central bank extended its policy pause for an 11th straight meeting in May, keeping rates at a 15-year high, as it reiterated its warning on inflationary risks.

Asia’s fourth-largest economy grew in the first quarter at the fastest pace in two years, thanks to strong exports, but there are worries that the recovery might be uneven as high interest rates squeeze domestic demand.

To revive the sluggish construction sector, the ministry said it would expand public-sector investments, infrastructure projects and policy financing in the second half by 15 trillion won more than previously planned.

It would, at the same time, continue efforts to manage liquidity risks related to real estate project financing so that they did not spill over onto broader financial markets.

The ministry also said it would prepare tax benefits to supplement the government’s ongoing corporate reform push aimed at boosting the domestic stock market – the “Corporate Value-up Programme”.

It would offer tax exemptions on corporate income for increases in capital returns to shareholders, introduce separate taxes on shareholders’ dividend income at lower rates than other financial income, and make changes to inheritance taxes so they were less burdensome on family-run companies.

($1 = 1,388.9400 won)

(Reporting by Cynthia Kim and Jihoon Lee; Editing by Sam Holmes and Stephen Coates)

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