South Korean Growth Probably Slowed, Stoking Recession Concern

By William Sim

Oct. 23 (Bloomberg) -- South Korea's economy probably grew at the weakest pace in four years last quarter, stoking concern a recession is looming as consumers cut spending and the global downturn erodes export demand.

Gross domestic product rose 0.6 percent from the previous quarter, when it advanced 0.8 percent, according to the median estimate of 16 economists surveyed by Bloomberg News. The report is due at 8 a.m. in Seoul tomorrow.

The won slumped 32 percent this year, the region's worst performer, and the stock index tumbled to the lowest since 2005 as the global credit crisis stifles economic growth, threatening recessions in the U.S., Europe and parts of Asia. South Korean manufacturers and retailers are cutting workers as demand eases and builders are reeling under the largest backlog of unsold homes in a decade.

``South Korea's economy is definitely heading down,'' said Daniel Soh, a regional economist at Forecast Pte in Singapore. ``The construction industry is a major worry. The economy will slow into a recession; it's happening all over the world.''

Economic growth cooled to 3.7 percent last quarter from a year earlier, the weakest since 2005, according to the survey.

South Korea this week pledged $130 billion, equivalent to 14 percent of GDP, to support lenders as the credit crunch saps local banks' access to foreign funds. The government also said it will spend as much as 8 trillion won ($6 billion) to shore up the property industry, including buying land and unsold homes.

Rate Cuts

The flagging economy, currently in its 10th year of expansion, reinforces expectations the central bank will cut borrowing costs further. The Bank of Korea lowered the benchmark rate to 5 percent on Oct. 9, the first reduction in four years.

Korean President Lee Myung Bak said this week that the current global financial meltdown is more severe than the currency crisis that swept the region a decade ago.

Still, the financial-aid plan, coupled with the government's relatively low debt and ample foreign reserves, may help South Korea avert a repeat of 1997 when it needed an emergency $57 billion bailout from the International Monetary Fund, 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, which last week sparked the won's biggest one-day drop since 1997 by placing the nation's five biggest banks on review for a rating cut, said the government's package is more ``swift and broad'' than expected.

`Provide a Backstop'

Kwon Goohoon, an economist at Goldman Sachs Group Inc. expects South Korea's economy will avoid a recession as lower interest rates and extra government spending help shore up domestic demand and as the won's slump aids exporters.

``We take comfort from the government's action to provide a backstop to the economy,'' Kwon said. ``The government has been running budget surpluses for eight years, so it has the capacity and willingness to use fiscal and monetary flexibility to help limit downside risks.''

South Korea's debt ratio is close to the lowest among major economies, said 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. South Korea on Oct. 19 agreed to give lenders access to $30 billion in U.S. dollars and guarantee $100 billion of foreign-currency debt.

`Better Equipped'

``We are a lot better equipped than 10 years ago,'' Jun Kwang Woo, chairman of the Financial Services Commission, said in an interview this week. ``We certainly have the right kind of support mechanism to be used whenever it is needed.''

Growth is cooling across Asia, where China's expansion slowed to the weakest in five years last quarter, Japan's economy shrank in the second quarter and Singapore tumbled into a recession.

Posco, Asia's biggest maker of stainless steel, said this week it will slash planned output by about a third this quarter and rival South Korean steelmakers may also cut production to cope with moderating demand.

The following table shows estimates for GDP from the previous quarter and from a year earlier, as well as predictions for 2008 and 2009 growth.

                                    QoQ%   YoY%   2008   2009
-------------------------------------------------------------
Median                              0.6%   3.7%   4.2%   3.5%
Average                             0.5%   3.7%   4.2%   3.2%
High Forecast                       0.7%   4.2%   4.5%   4.2%
Low Forecast                       -0.1%   3.1%   3.4%   2.0%
Number of Forecasts                  16     19
=============================================================
Action Economics                    0.6%   3.8%
Capital Economics                   0.3%   3.6%   4.0%   2.5%
CFC Seymour                        -0.1%   3.1%    N/A    N/A
Citi                                0.6%   3.9%   4.2%   2.2%
Credit Agricole Indosuez             N/A    N/A   4.0%   3.0%
Daewoo Securities                   0.7%   3.8%   4.3%    N/A
DBS Group                           0.7%   4.0%   4.4%   3.5%
Forecast Pte Ltd                     N/A   4.2%    N/A    N/A
Good Morning Shinhan Secs           0.6%   3.8%   4.3%   3.7%
HI Investment & Securities          0.6%   3.6%   4.2%   3.6%
HMC Investment Securities           0.3%   3.6%   4.2%   3.1%
HSBC                                 N/A   3.7%   3.4%   2.0%
Hyundai Securities                  0.5%   3.4%   4.3%   4.0%
ING Bank                            0.6%   3.9%    N/A    N/A
Mirae Asset Securities              0.2%   3.4%   4.1%   3.2%
Moody's Economy.com                 0.6%   3.7%   3.9%   3.6%
Samsung Securities                  0.2%   3.6%   4.3%   3.5%
SC First Bank                        N/A   3.8%   4.5%   3.9%
Taurus Investment& Securities       0.6%   3.9%   4.4%   4.2%
Thomson IFR                         0.3%   3.6%   4.0%   3.5%
=============================================================

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