South Korea is working on fresh steps to cushion the economy from the global credit crisis and to build on signs of a tentative return of investor confidence that carried the stock market to a record rally this week. Authorities have already put together packages worth some $135 billion, to support banks and builders, and sharply cut interest rates to try to shelter the economy from the financial storm unleashed by Wall Street last month.
The Finance Ministry said it would release details about the stimulus measures, widely expected to be focused on the construction industry, on Tuesday. The measures would include 9 trillion won ($7.3 billion) of additional government spending, the Maeil Business Newspaper said on Thursday.
South Korea is also considering guaranteeing foreign currency deposits, Shin Je-yoon, the deputy minister of international affairs at the finance ministry, told a radio programme. A raft of data on Friday underlined the impact on Asia's fourth-biggest economy from a global downturn where the economies of the United States, Britain, Japan and the euro zone are all contracting. Industrial output in the export-driven economy fell in September for the third month running, marking the longest spell of contraction since early 2001.
Consumer goods sales fell a seasonally adjusted 3.8 percent in September, the sharpest decline in three months, and a central bank survey showed manufacturing sentiment was its gloomiest since 2003, when the survey began. "The output figures are all grim, including inventories, consumption and investment. We may see a further slowdown down the road," Park Sang-hyun, an economist at HI Investment & Securities, said of the September figures released on Friday.
Seoul's financial markets ended mixed on Friday but the stock market closed the week up a record 18.5 percent, while the won finished the week up 10.3 percent against the dollar, the biggest since January 1998. That marked a dramatic turnaround from last week when stocks suffered their biggest fall in a week and the won ended at a 10-year closing low in local trading.
"There were sighs of relief as worries about dollar liquidity had been one of the main reasons for the market's freefall earlier this month," said Jun Ji-won, a stock analyst at Kiwoom.Com Securities. "This is good time for buying domestic stocks cheap, with good upsides with solid potential gains in the won," Jun added.
Investor sentiment was boosted this week by a record rate cut of 0.75 percentage point to 4.25 percent on Monday, taking rate cuts for October to 1 percentage point. The central bank also secured a $30 billion currency swap arrangement with the US Federal Reserve this week, easing the liquidity concerns that had raised fears South Korea's banks could fall victim to the global crunch in dollar funding.
Still, South Korea's markets have taken a battering from the global crisis that blew up last year and escalated after the collapse of Lehman Brothers last month. Seoul stock market's benchmark index has lost 41 percent since the start of the year and the won 27 percent, meaning that Korean shares are now some 60 percent cheaper in dollar value than 10 months ago.
The major concern for investors is that South Korean banks' foreign currency liabilities made it difficult for them to secure dollar loans at a time when financial institutions have become ultra cautious about dealing with one another.
But following the government's bank support package and the swap deal with the US Federal Reserve, Standard & Poor's Ratings Services on Friday removed South Korean financial institutions from its list of companies subject to a possible ratings cut.
Credit Suisse recommended investors buy more South Korean stocks. Investors are now awaiting the release on Monday of October export and inflation figures, which will be closely watched to gauge the possibility of more rates cuts. October exports will probably show their slowest annual growth in 13 months, a reflection of waning demand abroad, while the consumer inflation in the month is expected to show an easing for a third consecutive month, Reuters surveys show.
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