South Korea Consumer Sentiment Drops as Stocks Tumble

By William Sim and Seyoon Kim

Oct. 28 (Bloomberg) -- South Korea's consumer confidence fell in October after shares and the currency tumbled on concern the economy will sink into its first recession since the nation was bailed out by the International Monetary Fund 10 years ago.

The sentiment index dropped to 88 from 96 in September, the Bank of Korea said in Seoul today. That's close to the eight- year low of 84 reached in July. A reading below 100 indicates pessimists outnumber optimists.

South Koreans may further stem spending as shares plunge and companies cut workers, damping an economy that last quarter grew at the weakest pace in four years. The central bank slashed interest rates by a record yesterday to restore confidence in the nation after the Kospi stock index declined 21 percent last week, the biggest drop in at least two decades.

``Consumers are likely to rein in spending for some time,'' said Go You Sun, an economist at Daewoo Securities Co. in Seoul. ``South Korea has taken a series of measures hoping they will help boost confidence but it'll take a while. Global markets are still bad.''

South Korea last week pledged to guarantee bank borrowings up to $100 billion and said it will spend as much as 8 trillion won ($5.5 billion) helping the building industry, including buying unsold homes and land. The central bank yesterday eased rules on foreign-currency lending to aid exporters.

The won fell 2.3 percent to 1,479 per dollar at 9:20 a.m. in Seoul, extending this year's slump to 37 percent. The Kospi index dropped 2.8 percent to 920.10 after rising 0.8 percent yesterday following the interest-rate cut.

Asian Slowdown

The outlook is dimming across Asia as the credit crisis deepens. Japanese retail sales dropped for the first time in 14 months in September, a report showed today. China's economic expansion moderated to the weakest in five years last quarter.

The Bank of Korea cut the benchmark interest rate by 75 basis points to 4.25 percent at yesterday's emergency board meeting, the second reduction in less than three weeks, to prevent a ``sharp contraction of real economic activity.''

``The rate cut is needed and it's probably just the beginning,'' Duncan Wooldridge, chief Asia economist at UBS AG, said in an interview with Bloomberg television in Hong Kong yesterday. Asia's economies will have ``a very significant slowdown, a recession if you will,'' he said.

Consumers Concerned

An index measuring consumers' view of the economic outlook plunged to 61 in October from 82 the previous month, today's Korean report showed. The central bank began in September releasing the confidence survey monthly instead of quarterly.

South Korea banks and companies are struggling to service offshore debts and secure new funds as the won tumbles and the global credit crisis raises the cost of borrowing overseas.

President Lee Myung Bak said this week South Korea is far from experiencing a repeat of 1997, when the currency lost half its value and the government needed a $57 billion loan from the IMF to help companies repay debt.

Economic growth slowed to 0.6 percent in the third quarter as exports declined by the most in almost seven years and consumer spending stagnated. Jobs growth slowed in September to the weakest pace since 2005 as Korean manufacturers, builders and retailers cut workers.

Posco, Asia's biggest maker of stainless steel, said last week it will slash planned output by about a third this quarter to cope with faltering demand. Lotte Shopping Co., the nation's biggest department-store operator, said last week that third- quarter profit fell 19 percent because of moderating sales.

The consumer confidence index is based on a survey of 2,200 households in 56 major cities conducted by mail and telephone for one week around the 15th day of each month.

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net; Seyoon Kim in Seoul at Skim7@bloomberg.net