UBS Expects South Korea Economy to Shrink 3% in 2009

By Seyoon Kim

Nov. 21 (Bloomberg) -- UBS AG forecast South Korea's economy will shrink 3 percent in 2009, which would be the first contraction since the country's financial crisis in 1998.

UBS previously forecast the economy would grow 1.1 percent next year. South Korea expanded 5 percent last year.

``Korea's credit bubble is popping at the seams even as policymakers now attempt to shore up the system,'' Duncan Wooldridge, UBS's chief Asia economist in Hong Kong wrote in a note to clients yesterday. ``The worst pressures to come from weaker exports are unlikely to be felt until sometime in the first half of 2009.''

The Kospi stock index fell 3.4 percent today, headed for the lowest level in more than three years. The won extended declines after weakening yesterday beyond 1,500 per dollar for the first time in a decade. The central bank cut interest rates three times in the past four weeks and the government has pledged to spend more money for the economy.

The government on Nov. 3 pledged to spend an extra 14 trillion won ($9.7 billion) in 2009. The package will add 1 percentage point to economic growth, which is at risk of falling below 3 percent in 2009 if global conditions deteriorate further, according to the government estimate.

``Our first key assumption remains that Korea has a large credit bubble and it should burst,'' Wooldridge said. He said that slowing exports, rising unemployment and expanding household debt as risks to the economy.

Weakest Pace

The economy expanded at the weakest pace in four years last quarter as exports declined by the most in almost seven years and consumer spending stagnated. Corporate bankruptcies also rose to their highest level in more than three years in October.

The nation has pumped funds into the financial system as the deepening global economic and financial crisis makes it harder for banks and companies to secure funds. The Bank of Korea will probably make an announcement next week on how to support the government's plan to create a fund for investment in corporate bonds, including those issued by banks, and other debt securities, a central bank official said yesterday.

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