Posted on: Friday, August 3, 2001

Export, investment problems may stunt S. Korea economy

Bloomberg News

SEOUL — South Korea's economic growth might not rebound this year as hoped, held down by falling exports, factory production and corporate investment, Finance Minister Jin Nyum said.

"The timing of an economic recovery is uncertain," Jin said in the prepared text of a speech to local news editors. "Industrial production growth has slowed since May, and facility investment and export growth continue to slacken."

To combat that, the central bank may have to cut interest rates more and the government needs to follow through with pledges to force debt-strapped companies into bankruptcy, the International Monetary Fund said.

The central bank's policy-setting board meets next week, and may trim rates for a second month after reports earlier this week showed inflation slowed and exports had their biggest drop on record in July.

The Bank of Korea cut its benchmark call rate, charged to commercial lenders for overnight loans, a quarter-point to 4.75 percent on July 5. It also cut the rate a quarter-point in February.

Jin hinted he would like the central bank to lower rates again. "When exports are in a difficult situation we have to use fiscal and monetary policy in combination in order to maintain a certain level of domestic demand," he said.

The IMF signaled it also favors lower rates. The fund's board "endorsed the Bank of Korea's recent decision to lower its overnight call rate target, and generally supported the use of the scope for some further easing, if necessary," it said in a report on South Korea.

Jin said earlier this year he hoped an economic recovery in the United States, which buys about one-fifth of South Korea's exports, would fuel a pickup in Korean growth in the second half of this year. Recent economic reports suggest that's not happening yet.

Industrial production shrank 1.9 percent in June from May as falling orders forced businesses to leave more capacity idle, and companies plan to cut spending on their factories this year.

Faltering U.S. growth is partly to blame. The world's biggest economy grew at its slowest rate in eight years in the second quarter as business investment slumped. Gross domestic product expanded at a 0.7 percent annual pace, just over half the previous quarter's pace.

Jin said the Korean economy may grow as little as 4 percent this year if U.S. growth doesn't pick up. The government last month cut its growth forecast to between 4 percent and 5 percent from 5 percent to 6 percent.