By Kim Kyoungwha
Oct. 31 (Bloomberg) -- South Korean currency declined after manufacturers' confidence tumbled to a record low, adding to concern the economy may sink into a recession.
The won fell 2.7 percent to 1,285.50 per dollar, following a 14 percent surge yesterday after the central bank signed a $30 billion currency swap with the Federal Reserve. The Kospi stock index rose 0.3 percent to 1,088.15 at 10 a.m. in Seoul after yesterday's record 12 percent increase.
South Korea has stepped up efforts to alleviate a credit squeeze and revive the economy amid concern the nation is headed for a repeat of 1997, when it needed an International Monetary Fund bailout. The central bank slashed interest rates by a record 75 basis points at an Oct. 27 emergency meeting and the government pledged to guarantee bank debt to help lenders struggling to access funds.
``The worst is behind us for the currency market,'' said Chun Chong Woo, an economist with Standard Chartered First Bank Korea Ltd. in Seoul. ``Still, what is heavily weighing on investors' minds is that the economy has yet to see the worst.''
The Fed's dollar provisions are part of the latest global actions to thaw money markets, with the U.S. also providing dollars to Brazil, Singapore and Mexico. The Fed, China, Hong Kong and Taiwan all reduce benchmark interest rates this week.
Korean lawmakers yesterday approved the government's $100 billion guarantee of bank debts. Default protection costs on South Korean government debt fell by the most in more than four years after the approval.
Economic Slowdown
Still, evidence of fallout from the global financial crisis and the won's drop on South Korea's economy is mounting.
An index of manufacturers' expectations for November tumbled to 65 from 78 the previous month, the central bank said today. That's the weakest since monthly data began in 2003, and a score lower than 100 means pessimists outnumber optimists.
KT Corp., the nation's largest phone and Internet company, today reported its seventh straight drop in quarterly profit after a weaker won boosted the cost of its foreign-currency debt.
KT joins LG Electronics Inc. and Hynix Semiconductor Inc. among Korean borrowers facing higher debt costs after the local currency tumbled. The won is on course for its third monthly decline and has dropped 27 percent this year, the most among the 10 most-traded Asian currencies outside of Japan.
Yesterday, President Lee Myung Bak said he's ready to take more steps to aid the economy. ``The global financial crisis has spread to the real economy and all nations are going through difficulties,' he said in a speech to business executives.
Further Aid
South Korea may spend an extra 9 trillion won ($7.1 billion) to help boost the economy, the Maeil Business Newspaper reported yesterday, citing a government official it didn't identify.
``The government needs to take more steps to support the economy as exports are expected to slow and local demand could weaken further,'' said Lim Jiwon, an economist JPMorgan Chase & Co. in Seoul.
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.
The Bank of Korea on Oct. 27 lowered the benchmark interest rate to 4.25 percent, the second reduction in less than three weeks. Governor Lee Seong Tae hinted at further rate cuts, saying policy makers will ``pay more attention'' to the risk of slower economic growth.
The benchmark three-year government bond yield has fallen 1.44 percentage point this month following the rate cuts. Bonds declined today, with the yield on the 5.5 percent note due June 2011 rising 5 basis points, 0.05 percentage point, to 4.43 percent, according to Korea Exchange.
``Further declines in yields may be limited as people are awaiting clearer signs of thawing in money markets,'' said Yang Jin Mo, a fixed-income strategist at SK Securities Co. in Seoul.
To contact the reporter on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.
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