S.Korea says economy hurting, unveils more measures

By Park Jung-youn and Seo Eun-kyung

SEOUL (Reuters) - South Korea warned on Thursday that Asia's fourth-biggest economy was already showing significant weakness as authorities added to a raft of measures to protect it from a severe global downturn.

President Lee Myung-bak was set to leave for Beijing for an Asian-Europe summit, looking to meet with the leaders of Japan and China to shore up the regional economy and proposing a new international body to steer through the global crisis.

After pledging to provide $130 billion to dollar-starved banks and another $4 billion to debt-laden builders, the central bank increased the ceiling on cheap loans to smaller companies.

Still, investors nerves have not been soothed by the raft of measures this week. The main stock market hit a 40-month low on Thursday and trading was halted on its junior market partner Kosdaq, which dropped to record low.

The won slumped to its lowest domestic close since the Asian financial crisis a decade ago.

Under pressure to take more action, authorities next move could be another cut in interest rates, analysts said.

"Lower interest rates could accelerate the won's slide but the central bank must prevent a hard-landing of the economy," said Moon Byung-sik, a Daishin Securities fixed-income analyst, who sees a possible 50 basis point cut in November, when the central bank is next scheduled to meet.

The view was given some credence by the governor of the central bank who said the economy was under pressure and that would be a factor in deciding monetary policy.

"Of course there are some price-push pressures from the (weakening) won, but the domestic economy has considerably weakened in the third quarter," Lee Seong-tae told a parliamentary committee.

Third-quarter gross domestic product, due to be published on Friday, is expected to show that the economy grew at its slowest pace in four years in the third quarter.

"We expect the domestic economy to be considerably weak this year and through the first half of next year," he said.

Earlier this month, the Bank of Korea cut its benchmark interest rate by 25 basis points to 5.00 percent, the first reduction since late 2004. The cut was announced a day after major world banks joined forces in cutting their rates to try to restore confidence to financial markets.

Governor Lee was later quoted by a local online news provider as telling lawmakers that the economy would most likely grow less than 4 percent next year, compared with 5 percent last year and 4.6 percent projected for this year.

In raising the ceiling on cheap loans for smaller companies, the central bank is targetting the sector that provides most jobs in the economy.

It raised the ceiling to 9 trillion won ($6.61 billion) from 6.5 trillion won, a bigger-than-expected increase and the first rise in seven years.