South Korea Economy Watch

Korea Inflation May 2008

2008-06-02T23:24:00.001-07:00

South Korean hopes for lower interest rates have been significantly reduced by the latest government figures showing that inflation surged to a seven-year-high last month on rising commodity prices and the weaker won.Consumer prices rose 4.9 per cent in May from a year earlier, after climbing 4.4 per cent in April, well above the Bank of Korea’s target range of between 2.5 per cent and 3.5 per cent.

The weaker won – it has depreciated more than 10 per cent against the dollar this year – is adding to pressure on policymakers, who are struggling to tame inflation as record-high oil prices dent economic growth. South Korea is the world’s fifth-largest importer of crude oil.

High inflation is dampening consumer spending in Asia’s fourth-largest economy, although the country is holding up relatively well due to robust exports. Exports were up 27.2 per cent at $39.5bn (€25.4bn, £20.1bn) in May from a year ago, while imports grew 28.8 per cent to $38.5bn, resulting in a trade surplus of $1bn – the first positive figure in the past six months. The increase was driven by strong demand for Korean ships, mobile phones and flat screens from emerging economies such as China and those in the Middle East.

The South Korean economy grew 5.8 per cent in the first quarter from a year ago.

South Korea Exports March 2008

2008-05-01T02:50:00.001-07:00

South Korea’s exports grew at their fastest pace in more than three years in April, as strong demand from emerging markets and a weaker local currency offset the impact of a US economic slowdown. Exports, which make up about 40 per cent of South Korea’s gross domestic product, shot up 27 per cent last month from a year earlier, exceeding March’s 18.6 per cent rise, according to figures released on Thursday.

Diversified markets and export products helped Korea weather cooling demand from the US and Europe, according to the latest data.

Exports to the Middle East jumped 43.9 per cent in the first 20 days of April and those to Latin America and China climbed by 28.5 per cent and 17.9 per cent respectively, while shipments to the US and Europe fell by 0.9 per cent and 2.5 per cent respectively.

The strong rise in exports comes as a relief to the new government, which is sticking to its 6 per cent target for economic growth despite the slowing global economy. But it adds to the dilemma confronting the Bank of Korea, which is under pressure to cut interest rates to boost sluggish domestic demand even as inflation rises.

The BoK is to hold its next monetary policy board meeting May 8. Thursday‘s strong export data is expected to ease pressure for the central bank to cut rates this month as consumer prices rose 4.1 per cent in April, above its 2.5-3.5 per cent target range.

South Korea GDP Growth Slows in Q1 2008

2008-04-25T00:22:00.000-07:00

South Korea’s economy grew at its slowest pace in more than three years in the first quarter of 2008 as domestic demand cooled, increasing the prospects of a near-term rate cut by the central bank. The economy expanded 0.7 per cent from the previous quarter, when it grew 1.6 per cent, the Bank of Korea said on Friday. Year on year, growth was 5.7 per cent, euqal to the rate in the previous quarter.

Rising fuel costs combined with a deteriorating outlook for exports prompted companies to reduce investment, while record household debt is sapping consumer buying power.

The near-term outlook does not seem to be too positive with the government expecting exports, which constitute 40 per cent of GDP in what is Asia’s fourth-largest economy, to slow in coming months as the global economy cools.

Domestic demand, which includes private and corporate spending, rose only 0.1 per cent IN Q1 - the slowest pace since the third quarter of 2004 - with growth in private consumption slowing to 0.6 per cent and corporate investment falling 0.1 per cent. Exports increased 12.8 per cent from a year earlier, down from a 17.7 rise the pevious quarter. Real gross domestic income, a measure of purchasing power, fell 2.2 percent from the previous quarter, when it rose 0.3 percent. That's the biggest drop since the fourth quarter of 2000.

Companies are beginning to scale back spending. Investment in new facilities fell 0.1 percent, after a 2.1 percent gain in the fourth quarter. Construction investment dropped 1 percent after a 1.2 percent increase.

The value of South Korea's shipments overseas fell 1.1 percent in the quarter from the previous period as prices for semiconductors declined. From a year earlier exports climbed 12.8 percent. Still, Choi Chun Sin, head of the central bank's statistics department, said that while the central bank expects export growth to slow, overseas shipments would still record "double-digit" growth for the rest of the year. Export climbed 31.5 percent during the first 23 days of April from the same period a year ago.

The outlook has worsened since January, when the Finance Ministry forecast consumer spending and construction investment would replace exports as the main drivers of economic growth. South Korea's jobless rate rose in March as builders and manufacturers shed workers, offering yet another signal that the economy's nine-year expansion is slowing. The number of people employed in the construction sector fell 1.9 percent from a year earlier and employment in manufacturing dropped 0.5 percent.

Unemployment edged up to 3.1 percent from 3 percent in February, the statistics office said today in Gwacheon.

These numbers are expected to add to pressure on the government to introduce measures to boost the economy. Kang Man-soo, finance minister, is quoted as saying this week that it would be difficult for the government to achieve the 7 per cent growth target for this year and stressed the need for a supplementary budget. He is urging the use of about Won4,900bn of tax revenue carried over to this year to build social infrastructure, something lawmakers from the ruling party strongly oppose.

Signs of a slowdown have been emerging as the pace of inflation accelerated to the fastest in more three years and the U.S. housing recession damps global growth.

In March, the leading economic index fell for a third month and the number of new hires declined to a three-year low. Retail sales slowed in February and factory output fell for a second month.

Consumers turned pessimistic for the first time in a year last month and manufacturers' confidence declined from a three- month high.

Meantime, the cost of servicing debt is rising. Lending by South Korean banks to households last month took the level to a record 367 trillion won, and the average lending rate stood at 6.95 percent in February, up from 6.28 percent a year earlier, according to the central bank.

The central bank has kept interest rates at 5 per cent for the past eight months but the BoK governor last month hinted at a rate cut soon, saying he was more worried about a slowing economy than inflation. Inflation hit a 3-year high of 3.9 per cent in March, above the central bank’s target range of 2.5 per cent to 3.5 per cent. The central bank left the seven-day repurchase rate unchanged at 5 percent on April 10. The bank last changed borrowing costs in July and August last year when it made quarter-point increases. Policy makers next meet on May 8 to review rates.

Meantime the won has strengthened, and is heading for its biggest weekly gain in three weeks as a rally in stocks spurred overseas investors to increase holdings of the nation's assets. Bonds are also set for a weekly gain.

The currency strengthened almost 1 percent this week, making it the best performer among the 10 most-traded Asian currencies outside of Japan. Korea's currency rose 0.5 percent to 991.25 against the dollar as of 10:03 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. Overseas investors bought more Korean shares than they sold every day of the week except one. The benchmark Kospi index climbed 1.4 percent.

South Korea Exports and Trade Deficit March 2008

2008-04-01T23:18:00.000-07:00

South Korea's exports accelerated sharply in March on the back of rising shipments of oil products, cars and mobile phones to Asia and Latin America. Overseas shipments rose 19.1 percent from a year earlier, quickening from February's 18.8 percent gain, the economics ministry said in Gwacheon today.

Increased shipments to China and emerging markets have helped exporters to withstand faltering sales to the U.S., where the economy may be in a recession. Still, South Korean factory output fell in February and manufacturers' confidence for April deteriorated, reports showed yesterday, signaling companies expect demand may slow.

Commenting on the general situation in South East Asia, Vikram Nehru, the World Bank’s chief economist for east Asia and the Pacific (ie not including Japan and Australia), said on Tuesday the shift in export orientation was taking place faster than expected. “I didn’t expect such a rapid shift towards non-US markets as we are seeing,” he told the Financial Times yesterday "That is a sign of very adept marketing, as exchange rates and incentives change."

While annual export growth from emerging east Asian nations initially slowed from 22 per cent in January of last year to 15-16 per cent in the third quarter, it has since rebounded to 18-19 per cent.

The World Bank also said more sophisticated domestic production was allowing China to source more of its input needs internally.

“If this trend continues and if other east Asian economies are able to exploit these new opportunities in China’s domestic market then, over time, China is also likely to become an increasingly independent growth pole for the rest of east Asia,’’ the bank said.

Exports advanced to $36.2 billion in March and imports gained 25.9 percent to $36.9 billion, today's report showed. But Korea also posted a trade deficit of $668 million, the fourth consecutive shortfall. However, the March deficit was smaller than that in the first two months of 2008 as soaring oil prices reduced oil imports to 72 million barrels per day, down 10.8 percent from February. South Korea had previously enjoyed a monthly trade surplus for a number of years before starting to generate a deficit in December 2007.

Exports to China climbed 31.5 percent and sales to the European Union gained 21.4 percent in the 20-day period, outpacing a 10 percent increase in shipments to the U.S. China is South Korea's largest overseas market, buying 22 percent of exports. Manufacturing activity in China, the world's fastest-growing major economy, accelerated in March, a survey of purchasing managers showed recently.

South Korea's exports to central America and South America surged 49.6 percent in the first 20 days of last month from a year earlier, today's report showed. Shipments of oil products jumped 83.4 percent in the first 20 days of March and exports of mobile phones gained 48 percent. Exports of cars rose 28.5 percent in the 20-day period.

The Kospi index has dropped 10 percent and the won has fallen 5.8 percent this year on growing concern fallout from the U.S. housing recession and global credit-market slump will cool economic growth in coming quarters.

The 2008 trade surplus is likely to ``miss'' the government's target of $13 billion because of rising oil prices, Oh Jung Kyu, director general for trade and investment at the ministry told reporters in Gwacheon today. Import costs have increased as the price of Dubai crude oil, an Asian benchmark, surged 70 percent since the start of 2007. South Korea buys 97 percent of the fuel it needs from overseas.

South Korea Inflation March 2008

2008-04-01T00:05:00.000-07:00

Consumer prices accelerated slightly in March even as industrial production, investment and consumption are weakening. According to the National Statistics Office (NSO), consumer prices rose 3.9 percent in March over March 2007, up from a 3.6 percent gain in February, as surging crude oil and other international raw material prices raised costs of goods and services in Korea.

Seasonally adjusted inflation rose 0.9 percent from a month earlier, the largest increase since January 2005 when the month-on-month inflation jumped 1 percent. The 3.9 percent year-on-year growth is above the Bank of Korea's target range of 2.5 percent to 3.5 percent. The government is committed to trying to contain rises in consumer prices to below 3.3 percent this year.

Consumers felt the inflation burden more heavily last month since the cost of living index, consisting of food and other daily necessities, increased at 4.9 percent from a year ago, according to the statistical office. Manufacturing goods were up 6.3 percent, reflecting a steep rise in raw material costs, while prices of agricultural, fisheries and livestock goods fell 1.3 percent.

According to the statistical office, industrial output grew 10.1 percent in February from a year earlier, down from an 11.3 percent gain in January. Growth was lower than the market consensus of 12 percent and seasonally adjusted production fell 0.2 percent from a month earlier. Retail sales expanded 3 percent from a year earlier, down from a 4.6 percent year-on-year gain the previous month, while corporate facility spending on machinery and telecommunications declined 1.9 percent and orders received by construction companies also fell 6.2 percent.

South Korea Industrial Output February 2008

2008-03-31T00:13:00.000-07:00

South Korea's industrial production unexpectedly fell for the second time in three months in February, indicating economic growth may be cooling. Output declined 0.2 percent from January, when it jumped 2.5 percent, the National Statistical Office said today in Gwacheon.

According to the National Statistical Office (NSO) Monday, although industrial output fell month on month it still grew by a healthy 10.1 percent year on year rate in February on increasing production of semiconductors and audio and visual equipment. This compared with an 11.3 percent year on year gain in January.

Service output also increased at a slower rate of 5.9 percent in February from a year ago, down from a 6.8 percent growth the previous month. The finance and insurance sector saw output increase by 15.4 percent, but those of entertainment and sports-related sectors and educational service businesses fell by 3.4 percent and 3.3percent, respectively.

How Far May the Won Fall in 2008?

2008-03-11T02:26:00.000-07:00

South Korea's won may fall considerably in the first half of 2008 as global credit-market losses lead overseas funds to sell holdings in Korean stocks according to a report out this week from State Street Global Markets.

The 3.1 percent drop so far this month in the Won's value vis a vis the dollar make it the world's worst currently performing major-exchange rate. Many economists consider that the decline will continue if the current-account deficit widens and the funds from stock sales continues.

Overseas investors have sold more Korean shares than they bought nearly every day this year on concern slowing global economic growth will damp demand for exports. Korea's won and the Indian rupee are the only two of Asia's 10 most-traded currencies outside of Japan that have weakened versus the dollar in 2008.

Cross-over equity flows, or purchases of stocks by overseas investors, into South Korea are the second weakest among the 29 developed and emerging-markets economies tracked by State Street Global Markets, the world's largest institutional money manager, and Korea's stock index has slipped 14.1 percent so far this year.

Korea's currency fell 1 percent this morning to 974.45 per dollar as of 1:41 p.m. local time, and this was the biggest decline since last August with the won reaching its lowest level since March 2006.

Korea's current-account is expected to run a $7 billion deficit this year according to the finance ministry yesterday, a figure which is twice the central bank's $3 billion forecast. Growth will fall short of 5 percent in 2008 and an earlier estimate of 6 percent because of slowing shipments abroad, Finance Minister Kang Man Soo said last week.

South Korea Central Bank Keeps Interest Rates Unchanged March 2008

2008-03-07T02:35:00.000-08:00

South Korea's central bank kept its interest-rate policy unchanged for a seventh month today, citing increasing inflation pressures and the deteriorating global economic outlook.

Governor Lee Seong Tae set the seven-day repurchase rate at 5 percent.
The yield on South Korea's five-year government bond rose 4 basis points to 5.09 percent, reversing an earlier decline.

The won traded at 957.50 per dollar at close of onshore trading in Seoul, little changed from before the decision and posting its biggest weekly loss in seven months. The main Kospi index of shares slumped 2 percent to 1,663.97.

Consumer prices rose 3.9 percent in January from a year earlier, the fastest pace in more than three years. Inflation slowed to 3.6 percent in February. The Bank of Korea in December forecast consumer prices to rise 3.3 percent this year.

Export growth accelerated in February, rising by 20.2 percent, and industrial output increased 2.5 percent in January from December. Expanding demand from China, the Middle East and other emerging markets helped protect Korea's exports from the slowdown in several industrialized economies.

Other figures suggest growth may have peaked after gross domestic product expanded at the fastest annual pace in almost two years in the fourth quarter. Corporate investment fell, inventories rose, and a leading index weakened for a second month, the March 4 production report also showed. The Kospi index has plunged 12 percent this year.

The central bank, which expects prices to moderate in the second half, aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009.

South Korea January 2008 Current Account Deficit

2008-02-28T05:05:00.000-08:00

South Korea experienced its biggest monthly current account shortfall in almost 11 years in January and may have to enlarge its deficit forecast for the whole year, the central bank said on Thursday.

The seasonally adjusted current account deficit widened to a provisional $2.03bn in January, the biggest since a $2.21bn loss in February 1997, from a revised $1.07bn deficit in December 2007, the Bank of Korea data showed.

The deficit, which has been swollen by the rising cost of commodities imports just as exports started to slow, means foreign trade will contribute less than before to the economy at a time when the economic outlook is already turning from bad to worse.

In seperately released data we learnt today that companies were growing more worried about the immediate future, with the Korea Chamber of Commerce and Industry’s sentiment index for the second quarter hitting the lowest in more than a year. The chamber’s index, which fell to 97 for the second quarter from 99 for the first quarter, came hours after the central bank’s March survey index for manufacturing firms stood steady at a 9-month low of 86 set in February.

President Lee’s government has already pledged to lower corporate taxes, cut domestic sales taxes on oil products and roll back regulations to boost investment, but the effect will most likely be limited because key risks are from abroad.

The worsening current account performance is negative for the won, which has already been in gradual decline against the dollar since hitting a decade high at the end of October last year.

Yang Jae-ryong, who is head of the Bank of Korea’s international balance of payments team, told reporters that Korea’s current account deficit for 2008 could top the $3bn level previously forecast earlier by the central bank. If this happens it will be the first annual current account deficit in 11 years for South Korea, which has enjoyed a healthy current account performance helped by the won’s sharp drop during the 1997-98 financial crisis. This data comes one week before the central bank reviews interest rates on March 7. The Bank of Korea held rates steady at 5.0 per cent on Feb. 13 for a sixth consecutive month but said it could cut the rates whenever necessary.

South Korea Inflation January 2008

2008-02-01T04:16:00.000-08:00

South Korea's inflation accelerated in January to its haighest level in more than three years as costs of industrial goods and fuel rose following a surge in crude oil prices. The consumer price index rose at an annual 3.9 percent rate, as compared with a 3.6 percent increase in December according to data released by the statistics office today. The increase was the largest since September 2004. month on month prices were up 0.5 percent in January from December.

Bank of Korea Governor Lee Seong Tae said recently that inflation is expected to accelerate even as the risk of a U.S. recession increases.

According to the central bank half yearly economic outloook released in December consumer price inflation is expected to accelerate to 3.3 percent in 2008 from 2.5 percent in 2007. The central bank aims to keep inflation between 2.5 percent to 3.5 percent target range.

The central bank's policy board members next meet on Feb. 13 to decide on interest rates. In January the bank kept the overnight call rate unchanged for a fifth month at a six-year high of 5 percent, after back-to-back increases in July and August.

Core consumer prices, which exclude oil and other volatile items, rose 0.6 percent from December, and core prices were up 2.8 percent from January 2007.

Industrial goods prices rose 0.7 percent from December, boosted by a 1.8 percent gain in oil product costs, while the cost of agricultural, dairy and fisheries goods rose 0.2 percent over the month.

S Korea Trade Deficit Hits 11-year High

2008-02-01T04:06:00.000-08:00

South Korean exports in January grew more than expected in spite of a slowing US economy but firmer oil prices pumped the trade deficit up to the biggest in 11 years, data showed on Friday, dealing a blow to the won. Exports jumped 17.0 per cent led by oil products, flat-screen panels, machinery and mobile phone handsets, the Commerce Ministry data showed.

But a larger 31.5 per cent rise in imports – led by crude oil and topping market expectations for a 24.5 per cent gain – pushed the trade deficit up to its widest since early 1997, forcing the won to give up gains and weaken against the dollar.

South Korea’s longstanding efforts to diversify its export markets away from the US into emerging economies had been helping Korea maintain strong sales abroad until now, despite growing troubles in the US economy.

Exports in January amounted to a provisional $32.86bn on a customs-clearance basis and imports totalled $36.24bn, generating a deficit of $3.38bn, the data showed.

The import growth was at its fastest pace since a 33.8 percent annual gain in August 2004 and the trade deficit was its biggest since a $3.48bn gap in January 1997. The price of Dubai crude oil, South Korea's benchmark, jumped 53 percent since the beginning of last year. South Korea purchases 97 percent of its energy needs from overseas.

The won was trading at 944.1/8 per dollar at 0134 GMT, turning weaker from an earlier rise to as high as 941.6. South Korea is the region’s first major economy to release monthly trade data each month, making the country’s trade figures an important clue on the latest state of global demand.

Exports to China, the country's largest market, gained 5 percent in the first 20 days of last month while exports to the European Union jumped 36.1 percent. Shipments to the U.S., the second largest, rose 3.3 percent and exports to Russia climbed 21 percent, today's report showed. South Korea sends two-fifths of its total exports to China and the US, while electronics goods and cars account for about 45 per cent of the total exports in value.

China's economy, the destination of about a fifth of South Korea's shipments, expanded more than 11 percent in each of the past four quarters. By contrast, U.S. gross domestic product slowed to an annual rate of 0.6 percent in the fourth quarter from 4.9 percent in the previous three months.

The trade data came hours before the South Korean government is due to release January consumer inflation data. Both sets of numbers will provide an important feed into the Bank of Korea’s interest rate review on Feb 13.

South Korea GDP Growth Q4 2007

2008-01-25T01:02:00.000-08:00

South Korea’s economy grew faster than expected in the final quarter of 2007, driven by increased corporate investment and a recovery in domestic consumption, the Bank of Korea said today. Korea's gross domestic product rose a seasonably adjusted 1.5 per cent in the October-December period, Up from 1.3 per cent in the previous quarter.The economy expanded 5.5 per cent from a year earlier, the fastest pace in almost two years.

The robust growth was propelled by stronger corporate spending with corporate investment in factories surging 4.4 per cent in the last quarter, reversing the third quarter’s drop. Increasing consumption also contributed to economic growth with private consumption rising 1.1 per cent.

Exports remained resilient in the final three months of 2007 thanks to strong demand from China. Exports jumped 7.3 per cent, accelerating from a 1.5 per cent growth in the third quarter. It was the biggest increase since the final quarter of 2003.

Shipments to China, South Korea’s biggest export market, soared 18 per cent from January 1 to December 20 and exports to the Middle East jumped almost 40 per cent.

The central bank is likely to come under growing pressure to cut interest rates as higher oil prices and grwoing problems in the US economy and Europe are expected to threaten export growth. The principal problem is that the bank has little room to cut interest rates due to rising inflation.

The central bank has forecast that growth in Asia’s third-largest economy will slow to 4.7 per cent this year, much lower than President-elect Lee Myung-bak’s growth target of 6 per cent. The economy expanded 4.9 per cent last year from the previous year’s 5.0 per cent growth.

FDI in Korea 2007

2008-01-06T22:39:00.000-08:00

Planned foreign direct investment into South Korea fell for the third consecutive year in 2007, the commerce ministry said on Sunday, raising little hope that the situation would change in 2008. New FDI commitments fell 6.5 per cent to $10.5bn in 2007, although the figure for the fourth quarter increased 12.6 per cent over the previous year to $4.19bn. The ministry forecast steady FDI inflows of around $10bn (€6.8bn, £5.1bn) for 2008

“The appreciating won and slowing economic growth in the US and other developed nations remain as negative factors,” the ministry said in a statement.

The shrinking FDI plans underline China's emergence as a magnet for foreign investment. The investment climate in South Korea has also deteriorated as a result of increasing scrutiny of foreign capital and new regulations against hostile takeovers. South Korea has welcomed greenfield investment by foreign investors but there is increasingly hostile public sentiment towards foreign buyers.

South Korea’s outgoing government plans to revise foreign investment regulations to make exclusions on national security grounds more specific and provide stronger protection for major Korean companies targeted by overseas investors.

Pledged FDI in the manufacturing sector slumped 36.7 per cent last year to $2.69bn but rose by 14.9 per cent to $7.61bn in the service sector. Despite the US subprime loan crisis, planned FDI from the US rose 37.2 per cent to $2.34bn but FDI commitments from Japan dropped by 53 per cent to $990m and those from the European Union fell 13 per cent to $4.33bn.

There are some hopes that foreign investment could rebound this year as the next government is expected to adopt more investor-friendly policies. President-elect Lee Myung-bak, who takes office on February 25, has pledged to boost economic growth by attracting more foreign investment and encouraging corporate investment. But here, as in so many other cases, the proof of the pudding will be in the eating.

South Korea Debtor Bail Out Plan

2008-01-04T01:04:00.000-08:00

South Korea’s incoming government is planning a huge bail-out covering 7.2m consumer debtors behind on loan repayments or with poor credit ratings in an effort to spur consumption and prevent a repeat of a 2004 consumer credit crisis.

President-elect Lee Myung-bak, an ex-Hyundai executive, promised help for consumer debtors during the campaign leading up to last month’s presidential election. Economists have warned that South Korean households and small companies are facing a growing risk of default amid rising interest rates and a credit squeeze at the country’s banks.

But South Korea’s top financial regulator, the Financial Supervisory Commission, took things a step forward on Thursday when it outlined a bail-out plan to Mr Lee’s transition team.

Under the plan, credit delinquents with a small amount of debt will have their interest payments reduced and repayment deadlines extended. Their credit records will also be cleared.

Chang Su-man, a member of the transition team’s economic subcommittee, said the timing and the details of the plan have not yet been decided and it still required extensive discussions.

“There is no exact data about how much it will cost, but the plan will be implemented because it is one of Mr Lee’s main campaign promises,” Mr Chang said.

Local newspapers said the planned measures could cost the government about $11bn. Mr Chang declined to confirm that, but pointed out that that would be a small amount given that Seoul has spent $179bn to bail out struggling financial institutions and companies since the 1997-98 Asian financial crisis.

The number of South Korean credit delinquents has fallen significantly since the government rescued about 1m debtors in 2004 after the bursting of a credit card bubble left banks with bad debts.

Debtors with more than Won500,000 ($534) owed and more than three months behind on their payments stood at 2.7m at the end of June, down from a peak of 3.72m in 2003. But, according to finance ministry figures, some 7m South Koreans with poor credit ratings also owe about Won18,000bn in total.

Critics said the forthcoming plan could cause serious moral hazard and hurt the country’s banks, although Lim Ji-won, an economist at JPMorgan, called it a “pre-emptive” measure as the number of defaults was likely to rise with interest rates.

Seoul Attack It's Home Grown Sub-Prime Problem

2008-01-03T22:47:00.000-08:00

Merry Xmas and A Happy New Year

2007-12-24T15:08:00.001-08:00

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.

Credit crunch, did someone use the expression credit crunch?

South Korean Q4 2007 Consumer Confidence

2007-12-24T06:49:00.000-08:00

South Korea's consumer confidence declined from a five-year high, signaling spending may slow and crimp growth in Asia's fourth-largest economy. The sentiment index fell to 106 in the fourth quarter, the lowest in three quarters, from 112, the Bank of Korea said today in a report in Seoul. A reading higher than 100 indicates optimists outnumber pessimists.

The benchmark Kospi index of stocks has fallen 8 percent from a Nov. 1 record of 2085.45 on concern U.S. subprime-related losses will slow the global economy. Lehman Brothers Holdings Inc. this month cut its 2008 growth forecast for South Korea to 4.6 percent from 4.7 percent.

The yield on a five-year government bond rose 2 basis points to 5.87 percent at 3:00 p.m. in Seoul and the won gained 0.1 percent to 939.65 versus the dollar. The Kospi climbed 2.2 percent.

Confidence fell as ``sentiment on living conditions and the local economy weakened,'' the central bank said. ``The number of consumers with a negative view on the economy rose sharply.''

South Koreans' debt-servicing costs have climbed steadily as the central bank has pushed borrowing costs to a six-year high. The Bank of Korea raised rates in July and August to curb household debt that topped 600 trillion won ($640 billion) for the first time in September.

Land of the Rising Won

2007-11-02T00:29:00.000-07:00

From Bloomberg this morning:

South Korean Finance Minister Kwon Okyu said the nation's exporters will cope with the won's surge against the dollar, helping economic growth accelerate next year.

The won reached a decade-high this week and companies such as Hyundai Motor Co. say it will climb further, forcing them to cut costs to boost earnings. Kwon, who expects the won's rally to run out of steam, said rising shipments and a pickup in domestic demand mean the economy will grow 4.8 percent in 2007 and 5 percent next year.

``Even with global dollar weaknesses, Korean exports will continue their robust growth,'' Kwon, 55, said in an Oct. 29 interview in Gwacheon, near Seoul. ``Our competitiveness nowadays doesn't depend on price competition, rather it depends on the quality, technology and so on,'' he said.

Samsung Electronics Co., South Korea's biggest exporter, this year surpassed Motorola Inc. to become the world's second- largest maker of mobile phones behind Nokia Oyj as it focused on more expensive handsets. Exports climbed to a record in October as higher shipments to China and Europe helped cushion the $887 billion economy from a slowdown in U.S. demand.

``Korean exporters have successfully diversified their markets and enhanced their product quality,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``As a result, Korean firms are better placed to weather shocks in individual overseas economies than in the past.''

Chinese Partner

Exports to China surged 33.1 percent in the first 20 days of October from the same period a year earlier, the Commerce Ministry said yesterday. China replaced the U.S. as South Korea's biggest export market in 2003.

Gross domestic product expanded 5.2 percent in the second quarter from a year earlier, the fastest pace in almost two years. The economy has grown in each quarter since the second three months of 2003, the longest continuous expansion since one that ended in 1992.

Between the beginning of 2004 and the end of 2006, South Korea's won climbed 28 percent, making it the biggest gainer among the 10 most actively traded Asian currencies tracked by Bloomberg. Exports, which account for 40 percent of GDP, have grown 19 percent a year on average in the same period.

The won fell 0.4 percent to 907.20 against the dollar at 12:09 p.m. in Seoul.

Kwon yesterday told parliament that the government will continue to buy or sell the currency to curb speculation.

Currency Speculation

``The government is clearly committed to blocking any speculative move'' in the foreign-exchange market, Kwon said at a parliamentary hearing.

Kwon's comments on exporters and the won contrast with those of Kim Dong Jin, Hyundai Motor's vice chairman, who said this week the currency's advance is the ``No. 1 obstacle'' for South Korea's third-biggest exporter.

Kwon and Kim also disagree on the currency's direction. Hyundai's Kim sees further gains. Kwon reiterated his view the currency's advance will cease because demand will fall along with the nation's current account surplus.

``I don't think the currency has reason to appreciate further because the rate is determined by supply and demand,'' Kwon said. He predicts South Korea's current account surplus will drop to zero this year as more Koreans travel and invest overseas, reducing demand for won.

The Bank of Korea estimates the surplus this year will be $2 billion, down from $6 billion in 2006. The government earlier this year relaxed regulations so that individuals can invest more overseas. Some foreign exchange traders said a shrinking current-account gap probably won't be enough to curb the won.

`Wishful Thinking'

``It's wishful thinking to expect a current account deficit to curb the won's gains,'' said Kim Tae Wan, a Seoul-based currency dealer with Kookmin Bank, South Korea's biggest lender. ``New Zealand and Australia have huge deficits but their currencies are rocketing.''

Australia has recorded a current account deficit each quarter since 1973 with the shortfall climbing to a record A$16 billion ($14.6 billion) in the second quarter. The Australian dollar has surged 16 percent this year to a 23-year high. New Zealand's current account gap is 8.2 percent of gross domestic product and its currency has gained 8 percent this year.

Kwon said South Korea's rising demand for electricity gives him confidence to predict a rebound in domestic demand after a slowdown in the second quarter.

Electricity sales climbed 4.2 percent in September, after gaining 6.1 percent in August and 6.6 percent in July, according to Korea Electric Power Corp.

``Electricity demand is still increasing substantially,'' Kwon said. ``That means overall sentiment isn't that bad.''

Kwon said there are still risks to growth, including the U.S. housing recession and record oil prices.

A U.S. slowdown would be mitigated by rising exports to China and India, while the current oil price is ``endurable,'' he said.

The price of crude oil climbed beyond $96 a barrel for the first time yesterday and has surged 57 percent this year. South Korea imports almost all of its oil from abroad.

South Korea Q2 2007 GDP

2007-09-02T20:29:00.000-07:00

From Bloomberg today:

South Korea's Economy Expands 1.8 Percent on Exports

South Korea's economy expanded at the fastest pace in almost four years in the second quarter, helped by rising exports, according to revised figures released today.

The economy grew 1.8 percent, the quickest since the fourth quarter of 2003 and more than the initial estimate of 1.7 percent, the Bank of Korea said in Seoul. From a year ago, the expansion was 5 percent, up from July's estimate of 4.9 percent.

Rising overseas demand helped the country sustain the longest stretch of growth in a decade. Overseas shipments account for two-fifths of gross domestic product and orders from South Korea's biggest market, China, have more than compensated for a slowdown in the U.S.

``Growth is likely to remain resilient amid healthy exports and a pickup in domestic demand,'' Go You Sun, an economist at Daewoo Securities Co. in Seoul, said before the report was released. ``The economy will perform well through next year.''

Exports grew at the fastest pace in six months in July, a previous report showed. China's economy expanded 11.9 percent in the second quarter, the fastest pace in more than 12 years.

South Korea shows few signs of being affected by the fallout from the U.S. housing recession, Vice Finance Minister Kim Seok Dong said Aug. 30. Moody's Investors Service last month raised the nation's debt rating to A2, the sixth-highest investment grade.

Stocks rose and the currency fell. The benchmark Kospi index of stocks gained 0.3 percent to 1878.56 at 9:34 a.m. in Seoul. The won fell 0.02 percent to 938.45 against the dollar.

Exports, Consumption

Exports of goods rose 5.2 percent in the second quarter, matching the earlier estimate, today's report showed. Private consumption gained 0.8 percent, also unchanged from the earlier estimate. Business investment climbed 3.4 percent. Construction investment dropped 1.3 percent, less than the 1.4 percent decline earlier estimated.

The services industry expanded 1.3 percent in the second quarter from the first, compared with the previous estimate of 1.1 percent. A 22 percent gain in the country's stock index in the first six months of this year helped boost demand for financial products, today's report showed. The financial and insurance sector expanded 5.1 percent from the first quarter, up from the previous estimate of 3.6 percent.

Hyundai Motor Co., the country's largest automaker, said local sales jumped 88 percent and exports climbed 53 percent in July. Samsung Heavy Industries Co., the world's second-largest shipbuilder, has received $14.5 billion in orders this year, 97 percent of its annual goal of a record $15 billion.

2007 Growth Forecast

The central bank's 2007 GDP growth forecast of 4.5 percent remains ``valid,'' Ahn Kil Hyo, a central bank official said at a press briefing in Seoul.

Manufacturing expanded 3.6 percent in the second quarter from the first, matching the previous estimate. Manufacturers' confidence is at a 17-month high and factory production climbed seven times faster than expected in July.

Still, interest-rate increases may stifle spending. The Bank of Korea raised borrowing costs for the second time in two months on Aug. 9, bringing the benchmark rate to a six-year high of 5 percent.

``Two interest-rate hikes and sharp corrections in equity markets at home and abroad will eventually work against consumer spending unless household income growth unexpectedly accelerates,'' said Lim Jiwon, an economist at JPMorgan Chase & Co. in Seoul.

The benchmark Kospi index has fallen 6.5 percent since setting a record on July 25. For the year it has gained 31 percent.

Industrial Output Rises Rapidly

2007-08-29T12:28:00.000-07:00

From Bloomberg today:

South Korean Factory Output Jumps on Chips, Phones

South Korea's industrial production rose seven times faster than expected in July as companies increased output of semiconductors and mobile phones.

Manufacturing grew 2.1 percent from June, when it gained 1.9 percent, the statistics office said today in Gwacheon, South Korea. The median forecast in a Bloomberg News survey of 11 economists was for a 0.3 percent increase.

An increase in output may help to protect Asia's third- largest economy from a slowdown in consumer spending after the benchmark stock index fell from a record and the central bank raised interest rates twice in two months. Overseas shipments, which account for about 40 percent of the $887 billion economy, rose at the fastest pace in six months in July.

``Upbeat export momentum will keep the economy chugging along,'' said Kim Jae Eun, an economist at SK Securities Co. in Seoul. ``The economic recovery will remain unscathed for the moment.''

The won closed at 942 per dollar at 3 p.m. in Seoul, down 0.2 percent. The yield on three-year government bonds fell 2 basis points at 5.34 percent.

From a year earlier, industrial output climbed 14.3 percent in July, the fastest pace in 10 months, up from a 7.7 percent increase in June.

Production last year was depressed by strikes at Hyundai Motor Co. and its affiliate Kia Motors Corp. Auto shipments fell almost a third in July 2006. Car production jumped 38.1 percent in July from a year ago. From June, auto production declined 8.4 percent in July, today's report showed.

Semiconductors, Mobile Phones

Production of semiconductors rose 4.9 percent from June and mobile-phone output climbed 9.5 percent, both on rising demand from overseas buyers, today's report showed.

Semiconductors and mobile phone are ``two important sectors in assessing the impact of any U.S. slowdown on Asia,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. Mobile-phone demand shows an ``ongoing strength in consumer spending'' as the appetite for new model handsets tend to be discretionary.

Sales of consumer goods rose 1.6 percent from June. Corporate investment on facilities climbed 1.3 percent from a year ago.

Factory output may slow in coming months if South Koreans spend less after the central bank raised interest rates twice this year and local stock prices declined.

The benchmark Kospi stock index has dropped 8.9 percent since setting a record on July 25 on concern a U.S. housing recession would spread and slow global growth.

``The clear risk to what is a very optimistic outlook on South Korea at present is the increased likelihood of a more substantial slowing in U.S. economic activity,'' Maguire said.

The Bank of Korea lifted borrowing costs for a second time in two months on Aug. 9, bringing the benchmark rate to a six- year high.

Construction orders dropped 14.9 percent in July from a year ago, as there were fewer orders to build homes.

Bank of Korea Raises Rates

2007-08-08T23:36:00.000-07:00

The Financial Times this morning:

Bank of Korea surprises with rate increase

By Song Jung-a in Seoul

Published: August 9 2007 06:48 | Last updated: August 9 2007 06:48

The Bank of Korea unexpectedly raised its benchmark interest rate by a quarter point to a six-year high of 5 per cent on Thursday to absorb excessive market liquidity and contain growing inflationary pressure.

The rate hike, the first ever to follow just a month after a previous hike, surprised South Korea’s financial markets, driving bond prices down and pushing the won higher.

Lee Seong-tae, the BoK governor, said strong economic growth and increasing price pressure prompted the central bank to raise interest rates again as financial markets showed signs of instability amid explosive growth in the money supply.

South Korea’s economy grew 4.9 per cent in the second quarter, the fastest pace in over a year, beating economists’ expectations. The strong growth was propelled by robust exports, which jumped 20 per cent in July from a year earlier, and industrial output rose 7.6 per cent in June.

Mr Lee hinted that further tightening is unlikely this year, saying that ”the degree of financial accommodation will be markedly reduced” with the two consecutive rate hikes. And he cautioned that inflationary pressure would increase in the second half, due to a recovery in domestic demand and higher oil prices.

Bank loans to households increased by Won1,770bn in July from June, the biggest monthly gain in five months. Lending to small and mid-sized companies rose by Won3,100bn in July, increasing the risk of an asset bubble. Inflation remained stable at 2.5 per cent but Mr Lee predicted that upward pressure would grow in coming months.

Kwon O-kyu, the finance minister, supported the BoK’s move, saying the economy was showing ”clearer signs” of a recovery on the back of stronger consumption and brisk exports. ”The economic recovery, which started gradually from the beginning of the year, is becoming clearer,” he told reporters.

Both Mr Lee and Mr Kwon maintained their upbeat economic outlook, saying that the upward trend will continue in the second half, although higher oil prices and the stronger won still pose risks to economic growth. The BoK has forecast Asia’s third-largest economy to grow 4.5 per cent this year after expanding by 5 per cent last year.

Financial markets showed a sharp reaction to the surprise rate hike Thursday. The yield on the benchmark five-year government bond surged 7 basis points to a two-week high of 5.4 per cent and the won rose 0.2 per cent to 922.15 against the dollar in morning trading. The Kospi benchmark stock index pared gains to 0.6 per cent after being up as much as 1.3 per cent before the announcement.

and Bloomberg:

Bank of Korea Unexpectedly Raises Key Rate to 5%

The Bank of Korea unexpectedly raised its benchmark interest rate for a second time in as many months to curb lending that may fuel asset-price bubbles.

Governor Lee Seong Tae and his board increased the overnight call rate by a quarter point to 5 percent, the highest since July 2001, the central bank said in Seoul today. None of the 14 economists surveyed by Bloomberg News predicted the move.

Finance Minister Kwon Okyu said the decision was ``appropriate.'' He and Lee want to avoid a repeat of a debt bubble that burst in 2004 and stunted economic growth. Lending to households rose at the fastest pace in five months in July.

``The tipping point is likely to have been the explosion in household borrowing over July,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. ``The crippling debt overhang of 2001-03 remains clear in the mind of the central bank.''

In 2004, borrowers who had used credit cards to amass debt defaulted in record numbers, slowing the economy's expansion.

The yield on the benchmark five-year government bond surged 10 basis points to 5.43 percent as of 1:50 p.m. in Seoul, the biggest jump since October 2005. The won rose 0.2 percent to 922.32 per dollar. The Kospi stock index pared gains to 0.3 percent after rising as much as 1.3 percent before the decision.

Economists had expected the bank to keep rates on hold to assess the effect of the July increase and monitor whether a U.S. subprime mortgage slump will affect global growth. Today's move was the bank's first-ever back-to-back rate increase.

Urgent Task

``Concerns over soaring money growth outweighed U.S. sub- prime woes,'' said Kim Jae Eun, an economist at SK Securities Co. in Seoul. ``The most urgent task for the Bank of Korea is to put a lid on rising money growth and ensure fast growth won't cause asset-price bubbles and inflation.''

The Bank of Korea also raised the rate on so-called aggregate loans, which are offered to local banks to spur lending to smaller firms, to 3.25 percent from 3 percent.

``With a series of accumulated rate hikes, the degree of monetary easing that was supportive of the economic recovery has lessened considerably,'' Governor Lee told reporters in Seoul.

Lending by commercial banks to households surged 1.77 trillion won ($1.9 billion) in July from June, the central bank said yesterday. Loans to small and mid-sized businesses rose 3.1 trillion won, slowing from June's 8.1 trillion won gain, which was the biggest increase since December 2000.

Further Moves

``Given the hawkish tone of the central bank, a further tightening move before year-end cannot be ruled out,'' said Frederic Neumann, an economist with HSBC Markets Ltd. in Singapore. ``However, this will become dependent on trends in credit and liquidity growth over the next few months.''

Neumann maintained his prediction that lending and money supply will slow in response to credit-tightening measures and the key rate will stay at 5 percent for the rest of the year.

Central banks globally are battling to curb inflation as booming world economic growth forces up food and commodity prices. Australia raised its key rate to an 11-year high of 6.5 percent yesterday, and England, Canada and New Zealand all increased borrowing costs in the past month. European Central Bank President Jean-Claude Trichet said last week he may raise his benchmark rate from 4 percent next month.

South Korea's consumer-price inflation advanced 0.4 percent in July from June, when it was unchanged. The annual inflation rate remained at 2.5 percent. Consumer prices will climb 2.6 percent in the second half of 2007, accelerating from 2.2 percent in the first half, the central bank said last month.

Economic Revival

Growing signs of economic revival strengthened the case for a rate increase.

Consumer confidence climbed to the highest in 16 months in July, the National Statistical Office said today, signaling shoppers may help to sustain the economy's longest expansion in a decade. Consumer spending is showing a mild recovery, the central bank said today.

The economy expanded 1.7 percent in the three months to June 30, the quickest rate in 18 months. Exports gained 20 percent in July, while in June, service companies expanded at the quickest rate in almost five years and industrial production climbed for a third month.

``The Bank of Korea might think that hiking rates sooner than expected gives them room for a rainy day in the future,'' said Kwon Young Sun, an economist with Lehman Brothers Inc. in Hong Kong. ``Without any significant upside risks to growth, the bank should stay on hold for the rest of the year.''

Today's rate increase came even as South Korea's currency, the won, has strengthened. The won has surged to a 10-year high against the yen, the currency of its major export competitor.

Governor Lee said today that the won's strength will have little effect on easing inflationary pressure. Finance Minister Kwon said last week that the yen's weakness isn't justified. Borrowing in yen to buy higher-yielding assets -- the so-called carry trade -- threatens to destabilize global markets, he said.

The central bank last week introduced measures to restrict companies from borrowing in foreign currencies as it seeks to reduce the won's gains.

Borrowing in S Korea

2007-08-08T01:52:00.000-07:00

In Bloomberg today:

South Korea's Household Debt Grows at Fastest Pace in 5 Months

By Kim Kyoungwha

Aug. 8 (Bloomberg) -- South Korea's household debt grew at the fastest pace in five months in July, increasing pressure on the central bank to raise interest rates for a second time this year.

Lending by commercial banks to households surged 1.77 trillion won ($1.9 billion) from the previous month, the biggest rise since February, the Bank of Korea said in Seoul today. The gain was more than double a 776 billion won increase in June.

A resurgence in household borrowing may persuade central bank Governor Lee Seong Tae and his board to increase the benchmark interest rate from a six-year high. Policy makers raised the key rate to 4.75 percent last month on concern a jump in lending may spur inflation as economic growth accelerates.

Lee and his policy makers meet at 9 a.m. in Seoul tomorrow and an interest-rate decision is due before 11 a.m.

All 14 economists surveyed by Bloomberg News expect the bank will leave the rate at 4.75 percent. Still, nine of 14 analysts see a quarter-point increase to 5 percent later this year.

Lending to small and mid-sized businesses rose by 3.1 trillion won in July, slowing from June's 8.1 trillion won gain, which was the biggest monthly increase since the bank began compiling the figures in December 2000.

Mortgage lending advanced 127.4 billion in July, after climbing 710 billion won in June, today's report showed.

Lee and Finance Minister Kwon Okyu say that excessive lending and money-supply growth could push up prices and result in an asset bubble, undermining the economy's longest expansion in a decade.

In an effort to slow borrowing, the central bank on June 21 reduced the funds it makes available for loans to small businesses for the first time in six months. Last year, the bank ordered commercial lenders to hold more money as reserves.

Lf, the broadest measure of the money supply and formerly known as M3, rose an estimated 10.4 percent in June from May, the central bank said, citing preliminary figures. Lf stands for liquidity of financial institutions.

South Korean Exports

2007-07-31T09:35:00.000-07:00

From Bloomberg:

South Korea's Export Growth Seen Accelerating; Prices May Rise

uly 31 (Bloomberg) -- South Korea's exports probably rose at the fastest pace in almost three years in July, stoking economic growth. Consumer prices likely increased from June.

Overseas shipments surged 21 percent from a year earlier, according to the median estimate in a Bloomberg News survey of 11 economists. That would be the biggest gain since November 2004. Consumer prices advanced an unadjusted 0.3 percent from the previous month, the survey showed. Trade will be released at 10 a.m. in Seoul on Aug. 1 and the prices report at 1:30 p.m.

Rising exports have driven 17 consecutive quarters of growth in Asia's third-largest economy, the longest expansion in more than a decade. Increased overseas demand is stoking sales of LG Electronics Inc. mobile phones, Kia Motors Corp. cars and Hyundai Heavy Industries Co. ships.

``Strong exports and imports would suggest continued growth momentum in the second half this year,'' said Oh Suktae, an economist at Citibank Korea Inc. in Seoul. ``We continue to focus on the performance of the semiconductor and shipbuilding sectors as potential drivers of export strength.''

South Korea's economy expanded 1.7 percent in the second quarter from the previous three months, the central bank said last week, more than the 1.3 percent median estimate in a Bloomberg News survey of economists. That was the strongest rate since the fourth quarter of 2005.

Hyundai Heavy, the world's largest shipyard, said on July 27 it received an order for eight large-sized container vessels valued at 1.21 trillion won ($1.3 billion), its biggest contract this year.

Global Growth

Signs of faster global expansion will keep boosting demand for South Korea's exports, which make up 40 percent of the economy. The International Monetary Fund last week raised its forecast for world growth, downplaying the risk of a U.S. credit crunch crippling economic expansion.

The global economy will expand 5.2 percent in 2007 and 2008, the Washington-based IMF said, more than the 4.9 percent it predicted for both years in April.

South Korea's consumer prices climbed 0.3 percent from June, when they were unchanged, the Bloomberg News survey showed.

``Rising oil prices continue to push up the cost of industrial goods, and a modest recovery in consumption suggests upward pressure on service costs,'' Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong, wrote in a report. ``A counteracting force will be falling prices for agricultural, livestock and fishery products.''

Annual Inflation

The annual inflation rate stayed unchanged at 2.5 percent in July, according to the survey of economists. That would be at the lower end of the central bank's target range of between 2.5 percent and 3.5 percent.

The Bank of Korea raised its overnight call rate target on July 12 to a six-year high of 4.75 percent on concern record lending to small companies may spur inflation. Ten of 11 economists say the bank will increase the benchmark rate to 5 percent by December.

The following tables show economists' estimates for the change in exports and imports in July from a year earlier and unadjusted consumer prices from the previous month and from a year earlier:

Moody's Upgrade Sovereign Rating

2007-07-24T23:16:00.000-07:00

From Bloomberg this morning:

South Korean Won Rises to Highest Since 1997 on Growth, Moody's

July 25 (Bloomberg) -- The South Korean won rose, matching the highest since 1997, after economic growth accelerated to the fastest in 1 1/2 years and Moody's Investors Service upgraded the country's debt ratings.

Government and central bank concerns that the won's 1.7 percent advance this year would hurt exports may prove unfounded as overseas shipments gained 5.2 percent in the second quarter, nearly double the 2.7 percent increase in the prior three months. Moody's raised the sovereign rating one level to A2, citing ``fiscal prudence.''

``Whilst we don't expect any sharp moves on the back of a stronger economy the won can go stronger,'' said Magnus Prim, a senior foreign-exchange strategist at Skandinaviska Enskilda Banken in Singapore. ``Though the view from the authorities is that they don't want it too much stronger.''

The currency rose as much as 0.1 percent to 913.00, matching the level reached Dec. 7 that was the highest since October 1997. It traded at 913.35 as of 1:52 p.m., according to Seoul Money Brokerage Services Ltd. The currency may strengthen to 910 in one month, said Prim.

Vice Finance Minister Kim Seok Dong warned July 19 the government is ``focusing'' on gains in the won.

Korea's economy expanded 1.7 percent from the first quarter, the Bank of Korea said in Seoul today, faster than the 1.3 percent median estimate of 11 economists in a Bloomberg News survey. From a year earlier, the economy grew 4.9 percent.

Moody's Rating Upgrade

The ratings upgrade comes after Moody's put the nation under review July 3. The move puts South Korea's rating on par with China, Hungary and Israel. A higher debt rating signals a lower risk of debt default and may help reduce South Korea's borrowing costs.

Benchmark five-year bond yields, which move inversely to the price, declined 2 basis points to 5.45 percent, according to Korea Exchange. The price of the 4 3/4 percent note due March 2012 rose 0.09, or 9 won per 10,000 won face amount, to 98.94.

``Yields aren't moving much because investors are taking a wait-and-see attitude after the recent rate increase by the central bank,'' said Lee Yong Gyoo, a general manager at Hanwha Securities Co.'s fixed-income management team. ``This may continue until the release of key economic data later this month.''

The Bank of Korea July 12 raised its benchmark interest rate for the first time in a year to 4.75 percent on concern record lending to small- and mid-sized companies may spur inflation.

Q2 GDP Growth

2007-07-24T22:13:00.000-07:00

From the Financial Times:

Strong exports boost S Korea GDP Growth

The South Korean economy expanded at a much faster rate than expected in the second quarter, growing by 4.9 per cent compared to a year earlier, increasing the likelihood of further interest rate rises.

The acceleration – from an annual rate of 4 per cent in the first quarter – was largely due to robust exports and capital investment, according to preliminary date from the Bank of Korea released on Wednesday.

“Today’s data strengthens the case for another rate hike by the Bank of Korea, taking the benchmark rate to 5 per cent from 4.75 per cent currently,” said Frederic Neumann, Korea economist at HSBC.

“Even if there are few evident inflationary pressures, policy-makers continue to be concerned over loan growth and the strong output figure should lessen concerns that tighter monetary policy would derail the recovery,” he said.

Earlier this month the central bank raised interest rates for the first time in 10 months, citing inflationary pressure and abundant liquidity in Asia’s third largest economy.

The Bank of Korea data showed the quarterly rate of gross domestic product growth accelerated from 0.9 per cent in the first three months of the year to 1.7 per cent in the latest period, the fastest rate in 18 months. It was much higher than the 1.3 per cent consensus forecast of economists polled by Reuters.

The benchmark Kospi index, which briefly crossed the 2,000 mark on Tuesday to hit a record high, declined 1.12 per cent, to 1,969, when the Seoul stock market opened on Wednesday morning, largely due to profit-taking.

The Korean won, which was trading near a seven month high on Tuesday, also weakened slightly, trading at Won914.65 to the US dollar.

The GDP increase was due to strong growth in exports – they were 5.2 per cent higher in the second quarter, almost double the rate of the previous three months – and the sound performance of the service sector, which grew by 1.1 per cent, only slightly slower than the 1.2 per cent expansion in the preceding three months.

“The second-quarter growth was marginally higher than our expectations, and the economy seems to have reached the upper end of the bank’s target range of growth,” said Lee Kwang-june, director of the central bank’s economic statistics division.

“In the third quarter, the economy will continue to expand, but the quarterly growth is not likely to be as high as 1.7 per cent,” he told reporters.

The central bank and the government this month raised growth forecasts for this year to 4.5 per cent and 4.6 per cent respectively, and with the Bank of Korea operating a conservative monetary policy, further rate rises are expected.

However, some economists have warned this could choke off the nascent recovery. The economy remains in a fragile position, with the strong Korean currency – the won has gained 1.2 per cent against the dollar and 3.3 per cent against the Japanese yen so far this year – continuing to hurt exporters. Meanwhile, the domestic recovery has yet to get properly under way.