Weak won could help S.Korean recovery: OECD

SEOUL (Reuters) - South Korea authorities should not, in the current global turmoil, intervene to try to lift the fast-falling won as its weakness may in fact help speed up economic recovery, the OECD said on Tuesday.

In its latest outlook, the Organisation for Economic Cooperation and Development said the country's growth next year would slow to below 3 percent but would gradually pick up as the world economy improves, led by exports.

On Monday, the International Monetary Fund sharply cut its forecast for South Korea's GDP growth next year to just 2 percent, compared with an estimated 4.1 percent this year.

"Foreign exchange market intervention in support of the won is likely to be costly and ineffective in the face of global turbulence, and should therefore be limited to smoothing operations," the OECD said.

Monetary policy, it said, should focus on supporting economic activity and financial market stability until conditions normalize.

It added that South Korea's ample foreign exchange reserves had dropped 18 percent since June, partly due to authorities offloading dollars to support the local currency, but that the won had still failed to stabilize, dropping a trade-weighted 13 percent between mid-September and end-October.

The won's slide will likely further squeeze household and corporate income and hurt confidence, pulling growth down next year.

If the won stays at recent levels "Korea would be well placed to increase its share of world trade when the global economy rebounds. An export-led recovery would gradually spread to domestic demand, boosting output growth in 2010 to above 4 percent."

But the world financial turmoil could further worsen the short-term outlook by undermining the health of South Korean financial institutions, resulting in a credit crunch.

There is also a risk of high inflation becoming entrenched, which would eventually need tough monetary policy tightening to bring down.

(Reporting by Jonathan Thatcher; Editing by Jonathan Hopfner)