S. Korea's growth forecast declines along with exports
By Seyoon Kim
Bloomberg News Service
SEOUL, South Korea — The central bank expects South Korea's economy to grow by only 3.8 percent this year, less than half of last year's 8.8 percent pace.
Bloomberg News Service
Falling exports are the main reason for the slower growth, said the Bank of Korea's governor, Chon Chol-hwan, when he announced a second cut in interest rates earlier this month. Overseas shipments fell a record 20 percent in July from a year earlier, the fifth straight decline, as U.S. and Japanese customers slashed orders for computers and semiconductors. Exports made up about 45 percent of South Korea's economy last year.
A Shinhan Bank expert on foreign currency works the phone in the bank's building in Seoul. With a dramatic decline in exports slowing South Korea's economy, analysts have lowered their forecast of the nation's economic growth to less than half that of last year.
Chon also said falling industrial production and corporate investment point to a deepening slump. Production had its biggest monthly drop in nine months in June, and the central bank expects companies to cut investment in factories and equipment by 0.5 percent this year. South Korean companies trimmed overseas investments 41 percent in the first six months of the year.
The Bank of Korea lowered its key interest rate, the benchmark call rate, charged to commercial banks for overnight loans, to a record low 4.5 percent on Aug. 9. The bank had just cut the rate a quarter percentage point to 4.75 percent on July 5.
Chon said the country's slowdown is "more serious"' than expected and necessitated a second interest rate cut in as many months.
Chon said second-quarter growth probably missed the central bank's target of 3.3 percent annual growth. He said he's still hoping for a rebound in the fourth quarter, but added that inflation will slow in coming months, leaving the door open for further rate cuts.
Cheaper credit may provide relief for debt-ridden companies, making it cheaper to raise money to pay creditors or invest in new equipment. The central bank said borrowing from banks rose 5.5 trillion won ($4.3 billion) in July from June, almost twice the previous month's increase, after it cut rates in July.
Mike Newton, an economist at HSBC Holdings Plc in Hong Kong, said the central bank is "being realistic about the economic outlook. South Korea needs a more expansionary monetary policy." Newton expects another half-point rate cut by year-end.
Price increases, which slowed in July, will "gradually be blunted," Chon said. Signs of slowing inflation make it easier for the bank, whose main task is to rein in prices, to justify cutting interest rates.
Still, the central bank said it can't stem the economic slowdown alone, and called on the government to do more.
The government said earlier this week it plans to push through 30.3 trillion won ($23 billion) this quarter on public-works projects and other measures to boost domestic spending. It may also consider tax cuts, Finance Minister Jin Nyum said.
South Korean President Kim Dae-jung said the domestic economy needs all the help it can get as exports falter.
"Our economy is in a difficult environment," Kim told government ministers this month. "(We) have to strengthen our economy by creating purchasing power internally rather than depending only on exporting overseas."
The Bank of Korea has cut the key rate a total of three-quarters of a percentage point this year. It lowered the rate a quarter point in February.
