South Korean Won Falls as Confidence, Production Drop

By Kim Kyoungwha

Oct. 31 (Bloomberg) -- South Korea's currency dropped after manufacturers' confidence tumbled to a record low and factory output fell for a third month, adding to concern the economy may sink into its first recession in 10 years.

The won sank 3.2 percent to 1,291 per dollar as of the 3 p.m. close in Seoul, following a 14 percent surge yesterday when the central bank signed a $30 billion currency swap with the Federal Reserve. The Kospi stock index rose 2.6 percent, taking this week's gain to 19 percent, the biggest since at least 1987, after last week's record plunge.

South Korea this week cut interest rates by a record and approved a guarantee of bank debts to revive the economy, which grew at the slowest pace in four years last quarter. President Lee Myung Bak's government plans a further stimulus package next week, adding to $20 billion in income-tax cuts and benefits and 8 trillion won ($6.3 billion) aid to builders already promised.

``The relief rally of the last few days should be seen as just that and not the beginning of a more entrenched trend,'' said Dwyfor Evans, a currency strategist with State Street Global Markets in Hong Kong. ``There are continued concerns over the ability of the authorities to manage recession risk.''

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.

Factory production fell 0.6 percent last month from August, in the longest run of declines in almost eight years, the statistics office said today. Sales of consumer goods slipped 2 percent from a year earlier, the biggest decline in almost four years, and construction orders plunged 40.4 percent.

Debt Costs

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 28 percent this year, the most among the 10 most-traded Asian currencies outside of Japan.

``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.

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.

Shares Gain

South Korea's Kospi climbed to 1,113.06 at 3 p.m. in Seoul, led by exporters Posco and Hyundai Heavy Industries Co. The index rebounded this week after slumping 21 percent last week.

Still, the Kospi has fallen 23 percent this month, its worst monthly performance since October 1997.

Blackstone Group LP, manager of the world's largest buyout fund, said it will put $2 billion in South Korea in its first investment in the country.

Blackstone and the National Pension Service agreed to jointly invest in Korean companies, infrastructure projects and real estate, they said after the markets closed yesterday. They will also invest in Korean stocks and bonds.

The nation's 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.

`Crisis Has Spread'

Policy makers across the globe are stepping up efforts to thaw money markets, with the U.S. also providing dollars to Brazil, Singapore and Mexico this week. The Fed, China, Hong Kong and Japan all reduced benchmark interest rates this week.

``The global financial crisis has spread to the real economy and all nations are going through difficulties,' President Lee said yesterday.

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.

``What is heavily weighing on investors' minds is that the economy has yet to see the worst,'' said Chun Chong Woo, an economist with Standard Chartered First Bank Korea Ltd. in Seoul.

The Bank of Korea on Oct. 27 lowered the benchmark interest rate 75 basis points 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.

South Korea will delay its $1 billion dollar-denominated bond sale to international investors until next year when markets improve, Deputy Finance Minster Shin Je Yoon said on CBS radio in Seoul today.

To contact the reporter on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.