South Korean slowdown raises pressure for rate cuts

SEOUL (Reuters) - South Korean growth hit a four-year low and stocks ended their worst week on record on fears that a global recession will hit its export-dependent manufacturers, adding pressure on the central bank to prevent more damage by cutting rates.

The main index for Seoul shares plunged more than 20 percent for the week to its lowest close since May 2005 with investors pricing in a sharp drop-off in demand for goods as major overseas markets slip toward recession.

Underlining the problems facing Asia's fourth-biggest economy, its largest firm Samsung Electronics Co Ltd posted a 44 percent drop in third-quarter profit and forecast tough times ahead as consumers around the world feel the pinch.

"Oh, don't even bring up that stocks thing," said Son Kyung-hwan, an South Korean insurance agent and investor. "I am never going to dabble in the stock market again in my life. I even had to pay taxes to sell my stocks."

The government has announced a raft of measures this week to try to restore investor confidence and steady the wobbling economy, including providing $130 billion to dollar-starved banks and $4 billion to debt-laden builders.

The central bank added another just as the stock market closed, saying it would inject emergency liquidity of 2 trillion won ($1.4 billion) via 28-day repurchase agreements.

The Korean Composite Stock Index ended down 10.6 percent, dipping below the 1,000 mark for the first time since May 2005.

The economic downturn cast a cloud over investors in the streets of Seoul.

"Stocks? What do you expect, I'm doomed," said Seol Jae-woo, an education industry worker and investor.

SAMSUNG WOES

Samsung, which fell almost 14 percent to its lowest since December 2004, and other exporters weighed on the index despite a bounce on Wall Street on Thursday.

Samsung is facing a lengthy downturn in the once-reliable memory chip market, a rapid margin deterioration in the flat-screen sector and slowing demand for consumer electronics.

"We foresee the coming months to be an even more challenging period," said Chu Woo-sik, Samsung's executive vice president in charge of investor relations.

South Korea's economy expanded a seasonally adjusted 0.6 percent in the third quarter from the previous three months -- the slowest pace in four years. Facing the headwinds of the global financial crisis, economic prospects are grim.

"GDP growth will slow going forward. It is important for the Bank of Korea to not only cut rates but to show a strong commitment to support the economy and join international stimulus effort," said Kim Jae-hong, a Shinyoung Securities economist.

UNLIKELY TO MEET FORECAST

South Korea was unlikely to meet the central bank's growth forecast of 4.6 percent in 2008 after it grew by 5.0 percent in 2007, a senior central bank official said.

A Reuters poll this week forecast 2008 growth of 4.3 percent and 2009 growth of 3.5 percent.

The economy grew 3.9 percent over a year earlier in the third quarter, sharply down from 4.8 percent in the second quarter and marking its weakest annual performance since mid-2005.

Earlier this month, the Bank of Korea cut its benchmark interest rate by 25 basis points to 5 percent, the first reduction since late 2004. The cut was announced a day after key central banks joined forces in trimming rates to try to restore investor confidence to financial markets.

A battered won, down about 17 percent over the past month and more than a third so far this year, was likely to face more pressure from a central bank rate cut. It ended local trade down almost 4 percent against the dollar, though suspected intervention cut some of the losses.

South Korea's presidential Blue House said a three-way summit that includes Japan and China is set for mid-December to coordinate plans to boost the regional economy.

President Lee Myung-bak, at an Asian-Europe summit in Beijing, has said he also wants to form a new global agency to manage the credit crunch.

East Asian leaders said in Beijing they will move to form an $80 billion currency swap scheme by the middle of next year to help cushion the crisis' blow on economies. [ID:nSEO50048]

Lee has warned the global crisis threatened to be more severe than the Asian financial meltdown a decade ago that almost derailed South Korea's economy. At that time, the country was bailed out of its troubles by a rescue package led by the International Monetary Fund worth close to $60 billion.