UPDATE 1-S.Korea output buckles, analysts scent recession
By Seo Eun-Kyung
SEOUL, Nov 28 (Reuters) - South Korea's industrial output fell the most in two years in October, data showed on Friday, suggesting the economy is slipping closer to its first recession since the Asian financial crisis a decade ago.
Factory output skidded a seasonally adjusted 2.3 percent in October from September, widely missing market expectations for a 1.3 percent rise and adding pressure on authorities for action to support the sagging economy.
"The output data is really disappointing, signalling that the economy is slipping into a recession, a deep and long one," said Lee Sang-jae, an economist at Hyundai Securities.
"I believe the Bank of Korea has realised how serious the economic conditions are. It might move to cut rates further in December, possibly by 50 basis points," said Lee.
The Bank of Korea is next scheduled to review interest rates on Dec. 11. It has already cut its benchmark base rate by 1.25 percentage point to 4.0 percent, in an unprecedented series of three moves since early October.
Earlier, Finance Minister Kang Man-soo gave markets a modest boost by saying South Korea's current account was expected to swing into surplus next year from a projected deficit in 2008 of around $10 billion.
But analysts weren't so sanguine about the forecast.
"The current account will post a surplus next year, not because of better exports, but because of reduced imports. The won will continue to remain weak, and this will further pressure imports," said Lee Dong-su, an economist at Tong Yang Securities.
South Korea's won is Asia's weakest currency this year having slumped nearly 40 percent as foreign investors liquidated risky emerging economy assets, scrambling to protect themselves from the credit crunch and global market turmoil.
Underlining the Bank of Korea's fight to shore up the crumbling currency the National Pension Service (NPS) said it would sell $1.1 billion of U.S. Treasuries to the central bank in a bid to boost the country's foreign currency reserves, run down by months of dollar sales in fruitless market intervention.
The won was quoted at 1,468.9/9.1 per dollar as of 0600 GMT, slightly firmer than Thursday's domestic close of 1,476.0. It had advanced to as high as 1,449.9, the strongest since Nov. 20.
RESERVES CONCERN
Worry that the nation's once-impressive foreign exchange reserves may have already fallen below $200 billion this month have been fanning concerns over another currency crisis similar to the one that rocked South Korea over a decade ago.
That crisis prompted South Korea's last recession, pushing it into three straight quarters of negative growth between 1997 and 1998. Since then South Korea has experienced single quarters of negative growth on two occasions earlier this decade.
"Although the dollar supply from the pension fund is not an avalanche, it's better than nothing," said Song Jae-hyeok, an economist at SK Securities, adding the Bank of Korea's scramble for dollars was evidence of its current bind.
"The Bank of Korea is in the position where it has to decide between intervening to defend the won and conserving its forex reserves. If it intervenes those reserves will go down."
The latest official data showed that South Korea's foreign reserves fell by a record $27.4 billion to $212.25 billion at the end of October from September, the lowest level in almost three years as the country injected billions of dollars into the banking system amid the financial crisis [ID:nSEO252000].
The foreign reserve declined by a combined $52 billion since the end of March till October as the central bank struggled with a falling won.
"With the painful experience of the Asian financial crisis still haunting them, many Koreans are very sensitive to the nation's foreign currency reserve," Song said.
(Additional reporting by Kim Yeon-hee and Cheon Jong-woo, Writing by Marie-France Han and Keiron Henderson, editing by Jonathan Thatcher)
