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South Korea Set for More Action to Protect Its Economy

South Korea is working on a new set of policies to boost demand and offset the impact from a global slowdown on Asia's fourth-largest economy as investors are more hopeful that it has averted a full-scale financial meltdown.

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CNBC.com
Korea, Korean Flag

The Finance Ministry plans to announce next week measures to boost domestic demand that are widely expected to be focused on the construction industry given its quick spillover effects into other parts of the economy.

The Maeil Business Newspaper reported late on Thursday the moves would include 9 trillion won ($7.3 billion) of additional government spending next year.

"Worries that the financial meltdown will spread to the real economy are deepening," said Yoo Soo-min, a stock market analyst at Hyundai Securities. "Banking shares had been a real drag on the index on persistent fears they may have to make writedowns and their earnings will have a hard time recovering in the coming quarters."

Seoul stocks were up a modest over 2 percent while the won lost 2.5 percent in late trade, but both markets were headed for their biggest weekly gains in years.

Investment bank Credit Suisse recommended investors to buy South Korean stocks, saying it was the most "underowned" market in Asia.

Gloomier Than Ever

Investors are awaiting the release on Monday of October export and inflation figures, which will be closely watched for clues on interest rates.

October exports will probably post their slowest annual growth in 13 months, a Reuters survey shows.

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The Bank of Korea slashed interest rates by a total of 1 percentage point in October, including the largest-ever emergency cut of three-quarters of a point this week, to help keep the economy growing.

The government's measures come as a central bank survey showed on Friday that the outlook by export-led manufacturing firms was the gloomiest ever as the global economy looked set to slip into a severe slump following the financial crisis.

On Thursday, Seoul stocks jumped a record 12 percent and the won rose 14 percent in its biggest daily gain in 11 years after the Federal Reserve announced currency swap lines with South Korea and three other countries.

The stock market's benchmark KOSPI is up 16 percent on the week and the won by 16 percent as they head for the biggest weekly gains on record.

But shares in banks and manufacturers fell as investors increasingly turned their attention to the bleak outlook for exports. Bank stocks fell more than 4 percent and the electronics sector lost more than 2 percent.

South Korea has already offered a $130 billion package to help its banks avoid running out of dollars and a separate $4 billion scheme to help home builders faced with a growing number of unsold homes and worsening cash flows.

Its economy grew a seasonally adjusted 0.6 percent in the third quarter over the previous quarter, the central bank said last week, marking the slowest expansion in four years.

Ratings firm Moody's Investors Service forecast this month South Korea's economic growth would tumble to 2.2 percent in 2009, the slowest in 11 years, from around 4 percent this year.