(News Focus) Recession fear, lingering credit crunch cripple stabilization measures

SEOUL, Nov. 20 (Yonhap) -- A series of hastily-mobilized market stabilization
measures are failing to ward off market jitters with fears of a continuing global
credit crunch and a sharper than expected economic recession pounding the local
currency and shares, experts said Thursday.
After mid-September, when the U.S. investment bank Lehman Brothers Holdings Inc.
collapsed, the South Korean financial authorities and government mapped out a
series of measures to help calm the financial market.
The government and the Bank of Korea have injected US$30 billion into the
financial system to help ease local banks' dollar shortage, and plan an
additional $16 billion in trade financing.
On top of that, the government guaranteed local banks' foreign debt worth $14
billion as they face difficulties raising funds and rising bad debts.
The central bank has also slashed its base rate by 1.25 percentage points to 4.00
percent in a series of cuts, including the biggest in its history, from early
October, as the global downturn bites into South Korean economic growth.
Backed by drastic and unprecedented steps, local shares rallied sharply and the
currency market stabilized to some degree.
But the market is still roiling with the KOSPI plunging to a 5-year low and the
local currency hitting a 10-year low versus the U.S. dollar.
"After the collapse of Lehman Brothers, the local market was gripped with fears
of default," said Bae Min-keun, a senior researcher at LG Economic Research
Institute. "Now concerns are focused on the economic slump... which is fanning a
foreign sell-off of local shares," he said.
The country's key stock index has lost more than 45 percent so far this year. The
won, which rose to as high as 1,250 won to the dollar on October 30 when South
Korea and the U.S. agreed on a $30 billion currency swap, dropped to below the
1,500-won level.
The won has now lost 37 percent to the dollar so far this year, including a 13
percent loss this month alone with a record foreign sell-off in Seoul stock
markets.
Despite the unprecedented rate cuts by the central bank, yields on certificates
of deposit (CDs), which serve as a benchmark for market rates, have fallen just
0.48 percentage point this month.
"The South Korean government sighed with deep relief after the currency swap with
the U.S... but there is nothing resolved out there in the market," said Oh
Seok-tae, an economist at Citibank Korea Inc. "The sharper than expected economic
recession in the U.S. is still worrisome."
The South Korean economy, Asia's fourth-largest, is slumping hit by a global
economic downturn as exports, which account for more than 60 percent of its
economic expansion, is faltering on economic recession worldwide.
The economic growth slowed to 0.6 percent in the third quarter of the year, the
weakest pace since 2004, as exports declined the most in seven years and consumer
spending weakened.
Most economic research institutes are moving to lower next year's economic growth
rate at around 3 percent, or even 2-percent range, a sharp drop from this year's
estimated mid 4-percent gain.
Some foreign investment banks offered further grim outlook for the South Korean
economy. For one, U.K.-based Standard Chartered Plc this week lowered its growth
estimate for South Korea to 1.4 percent from 5 percent due to a slump in overseas
sales. Switzerland-based UBS put its growth estimate for South Korea at 1.1
percent next year.
"The market consensus is that the global financial market will continue to suffer
volatility, and economic recession is likely to be deeper than expected and to
last longer than expected," said Pyo han-young, a researcher at Hyundai Research
Institute.
In the first 17 days of November, exports fell some 20 per cent from the same
period last year, according to the Ministry of Knowledge Economy.
On Wednesday, the Ministry of Strategy and Finance projected that the country
would post a trade deficit of some $5.6 billion next year, the first time in 12
years the country will have posted a trade deficit for two consecutive years.
With domestic consumption already in decline, investors are increasingly fearful
of the prospect of foreign markets buying fewer South Korean exports
Reflecting global financial crisis and economic recession, foreign investors have
sold a net 2 trillion won worth of local stocks so far this month. So far this
year, they have net sold almost 35 trillion won worth of local stocks.
Experts said drastic and speedy restructuring efforts in some sectors such as the
construction industry are needed to secure a long-term economic expansion.
"Should sweeping and drastic restructuring efforts not be made, it would take
longer than expected time for the economy to recover," said Chung Yong-taek, an
analyst at NH Investment & Securities Co.
sam@yna.co.kr
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