S.Korea Demands Steps to Counter Economic Gloom

South Korea's president on Thursday ordered officials to take pre-emptive steps to counter what he called a state of national economic emergency as fresh forecasts and data deepened gloom over Asia's fourth-largest economy.

CNBC.com

Lee Myung-bak's comments at the first of what will be regular economic crisis meetings with top policy officials came as the finance ministry predicted exports would fall sharply this month and as data showed banks have tightened lending to companies.

Treasury bond futures soared as investors raised bets on further interest rate cuts in coming months, while the won and stock prices extended losses on worries about corporate earnings and the country's balance of payments.

"President Lee Myung-bak emphasised that we need more delicate and pre-emptive measures at this period of national economic emergency," presidential spokesman Lee Dong-kwan told reporters after the meeting.

Underscoring President Lee's description of the war-room style of the crisis meetings, the talks were held in a bunker in the presidential Blue House in central Seoul.

The central bank, the Bank of Korea, is already widely expected to cut rates by 50 basis points at its monthly policy meeting on Friday in addition to a combined reduction of 225 basis points since early October.

The Ministry of Strategy and Finance's monthly report released on Thursday underlined the increasingly dark prospects for exports, saying overseas sales this month would probably fall by more than the 17.4 percent annual fall posted in December.

Unprecedented Slump

March treasury bond futures rose as much as 61 ticks to 113.06, while the won skidded 3 percent on the day. The stock market's benchmark KOSPI index lost 2 percent on Thursday.

Economists said prospects for South Korean exports have been deteriorating much faster than expected, with demand from China shrinking fast and prices of key exports falling rapidly.

"Exports for the first quarter will show declines of more than 20 percent (over a year earlier) and by more than 10 percent in the second, but the risk is downward," said Ryu Seung-sun, an economist at HMC Investment Securities.

This bodes ill for domestic demand, which generates more than half of South Korea's annual gross domestic product, as the cooling exports will further dent already faltering confidence among consumers and entrepreneurs.

More From CNBC.com ...

• Lenovo Sees Quarterly Loss, to Cut 2,500 Jobs
• ProMOS, Elpida Submit Plan for Government Aid
• Australia's Macquarie Group Warns of Profit Hit
• China Drafts New Rules for Overseas Investments
• More Asia Pacific News

Central bank data released on Thursday showed local lenders called in the biggest amount in loans in four years from their corporate customers in December in the face of the persisting global credit crunch and bleak economic outlook.

Outstanding loans owed by local companies to banks fell by a net 6.6 trillion won ($5.02 billion) in December over a month earlier, the biggest drop since December 2004, the data showed.

As the clouds gather over South Korea's economy, Nomura International forecast the economy would contract 2 percent this year, sharply downgrading its previous 1.3 percent growth view.

That compares to Bank of Korea's December forecast of 2 percent growth this year after an estimated 3.7 percent expansion in 2008.

Copyright 2009 Reuters. Click for restrictions.