South Korean Economy Expands at Fastest Pace in Seven Years

By Seyoon Kim

Oct. 26 (Bloomberg) -- South Korea’s economy grew at the fastest pace in seven years, stoking speculation the central bank will raise borrowing costs for the first time since the collapse of Lehman Brothers Holdings Inc.

Gross domestic product increased 2.9 percent in the third quarter from three months earlier, when it expanded 2.6 percent, the central bank said today in Seoul. That was the fastest since the first quarter of 2002 and compared with a median estimate of 1.9 percent growth in a Bloomberg survey. From a year earlier, GDP rose 0.6 percent.

South Korea led a regional rebound with China and Singapore as companies including Hyundai Motor Co. and Samsung Electronics Co. reported surging profits, driven by exports. The nation may become the second in the Group of 20 after Australia to raise its benchmark interest rate since the height of the global financial crisis, BNP Paribas SA said this month.

“The bigger-than-expected GDP number definitely adds more weight for an interest-rate increase,” said Go You Sun, an economist at Daewoo Securities Co. in Seoul. “The number today made a clear basis for the Bank of Korea to justify a rate increase.”

Hyundai, South Korea’s largest automaker, posted record third-quarter net income of 979.2 billion won ($827 million). Samsung Electronics Co., Asia’s biggest maker of chips, flat screens and mobile phones, said earlier this month operating profit more than doubled to as high as 4.3 trillion won in the same period.

Stocks, Currency

The nation’s Kospi stock index climbed 1.1 percent at 12:55 p.m. in Seoul, taking the year’s gains to 47 percent. The won rose 0.4 percent against the U.S. dollar to 1,177.05, having increased 21 percent in the past 12 months.

Policy makers around the world are debating how quickly to withdraw monetary and fiscal stimulus measures to secure economic recoveries.

Bank of Japan policy makers this week are forecast to consider an announcement ending their purchases of corporate bonds in December, and economists including those at Credit Suisse Group AG predict China’s central bank will begin restraining credit growth in that country by year-end.

The Federal Reserve has already announced a phase-out of some of its emergency programs, while retaining a commitment to keep interest rates near zero for an “extended period.”

Full-Year Growth

South Korean Finance Minister Yoon Jeung Hyun said the GDP figures were a “surprise” and the nation may post full-year growth for 2009. He had said earlier this month the economy is likely to contract less than 1 percent this year.

“The situation has improved fast in the last few months, raising the possibility of annual growth while domestic demand is showing signs of leading the economic recovery,” Yoon said in a speech today in Seoul.

The nation still faces risks from a possible delay in the global economic recovery, asset price instability and higher oil prices, Yoon said. He reiterated that it’s “premature” to unwind expansionary policies introduced to prevent the economy slumping.

Central bank Governor Lee Seong Tae said last week that keeping interest rates at a record-low for an extended period isn’t healthy for the economy. Low rates have spurred consumer borrowing, with bank lending to households expanding for a seventh straight month in August before falling in September.

“I don’t think keeping rates too low for too long is good,” Lee told lawmakers at a parliamentary audit on Oct. 23. He said earlier this month a rate increase will be “more than” the usual 25-basis-point move.

Exports Gain

South Korea’s exports gained 5.1 percent in the third quarter from the previous three months, when they rose 14.7 percent, today’s report showed. Corporate investment in factories and equipment climbed 8.9 percent, compared with a 10.1 percent in the second quarter.

Private consumption advanced 1.4 percent from the second quarter. Government spending fell 0.8 percent and construction investment dropped 2.1 percent.

The rebound comes as Singapore raised its 2009 economic forecast after gross domestic product expanded for a second consecutive quarter in the three months through September. China’s economy expanded at 8.9 percent in the third quarter, the fastest pace in a year as stimulus spending and record lending growth helped the nation lead the world out of recession.

Sales at South Korea’s major department stores rose in September for a seventh straight month and exports fell at the slowest pace in 11 months. Manufacturers’ confidence climbed to the highest level in two years, earlier reports showed.

To prevent the economy from sliding into a recession, the central bank cut the benchmark interest rate by 3.25 percentage points between October and February to a record-low 2 percent.

The Bank of Korea will meet on Nov. 12 to review borrowing costs. South Korea hasn’t had a rate rise since August 2008.

“There’s spreading discussions about exit strategies after Australia raised interest rates,” Yoon said. “However, there’s a need to consider balancing the related dangers in judging the timing of an exit strategy. Considering our current status, I judge it’s premature to implement a full-fledged exit strategy.”

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net