South Korean Economy Grows at Weakest Pace in 4 Years

By William Sim

Oct. 24 (Bloomberg) -- South Korea's economy expanded at the slowest pace in four years last quarter, sparking concern the nation is headed for its first recession since requiring an International Monetary Fund bailout 10 years ago.

The economy grew 0.6 percent from the previous three months, when it advanced 0.8 percent, the central bank said in Seoul today. Goods and services exports fell 0.9 percent, the biggest drop in seven years, and household spending rose 0.1 percent.

The Kospi stock index plunged 11 percent, capping its worst week since at least 1987, and the won dropped near a 10-year low. The risk of a recession may force the central bank to cut interest rates a second time and the government to pump more stimulus into the economy after this week pledging $130 billion to help banks and as much as $8 trillion won ($6 billion) for the building industry.

``The global crisis has been brought home to Korea with a rapid deceleration in growth, and there's worse to come,'' said Daniel Melser, a senior economist at Moody's Economy.com in Sydney. ``The state of the economy demands a rapid easing in monetary policy from the Bank of Korea.''

Gross domestic product in the quarter matched the median estimate of 16 economists surveyed by Bloomberg News.

From a year earlier, the $970 billion economy expanded 3.9 percent, the slowest pace since 2005, and down from 4.8 percent growth in the second quarter.

`Shockwaves'

The Kospi index slumped to 938.75 at close of trading in Seoul, sliding below 1,000 for the first time since 2005 and extending this year's decline to 51 percent. The won fell 1.1 percent to 1,424 per dollar, taking its 2008 drop to 35 percent, Asia's worst-performing currency.

``Slowing U.S. and European growth have sent shockwaves through the economies of the developing world.,'' said Hiroshi Fujimoto, a fund manager at Shinkin Asset Management Co. in Tokyo, which manages the equivalent of $5.7 billion. ``Exporters are likely to see their sales drop off a cliff.''

China's economic expansion moderated to the weakest in five years last quarter, Japan's economy shrank in the second quarter and Singapore tumbled into a recession this year.

South Korea's Posco, Asia's biggest maker of stainless steel, said this week it will slash planned output by about a third this quarter to cope with moderating demand.

Samsung, Lotte

Samsung Electronics Co., Asia's largest maker of chips, flat screens and mobile phones, today posted its biggest quarterly profit drop in more than three years. The company's stock tumbled 13.6.

Lotte Shopping Co. said yesterday that third-quarter profit fell 19 percent, missing analysts' estimates, on slowing sales growth. Shares in South Korea's largest department-store operator plunged 13 percent today to a record low.

``Korea's economy will not be able to avoid a recession,'' said Arthur Woo, a Hong Kong-based economist at Merrill Lynch & Co. ``With global demand conditions set to slow further, this should have a knock-on effect to Korean exports.''

Real gross domestic income, a measure of purchasing power, declined 3 percent from the previous quarter, today's report showed. That's the biggest drop since the first quarter of 1998.

Jobs growth slowed in September to the weakest pace since 2005 as manufacturers, builders and retailers cut workers.

The Bank of Korea cut the benchmark interest rate by a quarter percentage point to 5 percent on Oct. 9, the first reduction in four years. The board meets again on Nov. 7.

``The central bank should take steps to help the economy,'' said Kim Jae Eun, an economist at Hana Daetoo Securities Co. in Seoul. ``Interest rates may go as low as 4 percent.''

Government Aid

South Korea this week pledged $130 billion, equivalent to 14 percent of GDP, to support lenders as the global credit freeze makes its harder for banks to secure foreign funds. It will give lenders access to $30 billion in U.S. dollars and guarantee $100 billion of foreign-currency debt.

Finance Minister Kang Man Soo said yesterday the government is ``working hard'' to avert a crisis in the economy.

The government will spend up to 8 trillion won to help builders, including buying land and unsold homes. The central bank said yesterday will make an extra 2.5 trillion won available for banks to lend at discount rates to small companies.

The financial-aid plan, coupled with the government's relatively low debt and ample foreign reserves, may help South Korea avoid a repeat of 1997 when it needed an emergency $57 billion loan from the IMF, the three main ratings companies signaled this week.

Moody's Investors Service and Fitch Ratings affirmed South Korea's sovereign credit ratings on Oct. 21. Standard & Poor's said the bank package is more ``swift and broad'' than expected.

South Korea's debt ratio is close to the lowest among major economies, says the Organization for Economic Cooperation and Development. The government's financial liabilities stood at 28 percent of GDP in 2006, compared with Japan's 180 percent and 62 percent in the U.S., according to the OECD Web site.

The nation's $240 billion in foreign reserves are the world's sixth-biggest holdings.

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