South Korea’s gloomy economic data spooks markets

SEOUL (Reuters): South Korea’s manufacturing sector activity shrank the most in 11 months in September as new export orders fell sharply, reinforcing fears of a slide back into global recession that are battering financial markets in one of Asia’s most vulnerable economies.

Economists said findings from the survey of South Korean purchasing managers at manufacturing firms were worrying as they indicated shrinking demand from China and other emerging economies as well as from the advanced economies.

“The fall in the PMI export orders component comes at what should be the strongest quarter for Korea’s exports,” said Tim Condon, head of Asia research at ING in Singapore.

“The failure of export shipments to claw back more of the August contraction in September was a worrying signal that global growth might be slowing,” he added, referring to a sharp decline in export shipments in August from July.

The benchmark stock index fell as much as 6 percent before cutting losses to finish down 3.6 percent, partly catching up with markets elsewhere in the region after a public holiday on Monday. The sharp falls prompted the bourse operator to suspend programme sales for five minutes.

The won fell to a 14-month low, prompting authorities in Seoul to intervene again in foreign exchange markets to support the retreating currency.

Vice Finance Minister Shin Je-yoon later issued a rare warning of intensified intervention at a briefing arranged after local trading finished.

Government data released last week showed South Korea’s goods shipments for export markets fell by a seasonally adjusted 0.2 percent in August over the month before, in addition to a 1.7 percent fall in July.



South Korea is home to some of the world’s leading suppliers of electronics and cars, while its exports include half-assembled kits that are completed elsewhere and re-exported to developed countries.





POSSIBLE DOWNGRADES



The latest economic data pointed to the central bank, which has been slow to raise rates, keeping borrowing costs on hold.



Some economists have already said they expected South Korea’s quarterly economic growth to nearly halve in the third quarter from the 0.9 percent rise in April-June and that they may have to review such projections for a possible downgrade.



The HSBC/Markit Economics survey showed the country’s manufacturing-sector activity probably shrank for a second consecutive month and by the most in 11 months during September as export orders tumbled.



The survey findings were in line with results of similar surveys on other manufacturing powerhouses, including China, but were released later due to a public holiday on Monday.



The won pared some of the losses on buying by exporters and talk of government intervention, but still ended down 1.3 percent against the dollar. It has lost 5 percent so far this year, largely in the last few months as investors globally dumped riskier assets for the relative safety of the dollar.



In addition, the won also received some relief after industry sources told Reuters foreign central banks and funds have been purchasing South Korean won bonds.



As the global turmoil makes it hard for smaller trading firms to secure dollar financing, the top financial regulatory agency called a meeting on Thursday with policy banks to discuss lending to the firms in foreign currencies.





STUBBORN INFLATION



Separate government data, released before markets opened, showed consumer price inflation eased by a full percentage point in September but stayed above the central bank’s target range for a ninth consecutive month.



Core inflation remained stubbornly high at 3.9 percent year-on-year, down from 4.0 percent in August, and, while a weaker won will feed through to higher inflation, lower oil prices will help tame rising prices, economists said.



Persistently high inflation, even as the country’s heavily export-dependent economy cools, puts the central bank in the most difficult position since the 2008 global financial crisis in managing its interest rate policy.



Bank of Korea governor, Kim Choong-soo, said in August it would not raise rates as long as uncertainty persisted in global markets.



It had raised the policy interest rate by a total of 125 basis points between July last year and June this year, unwinding part of reductions of 325 basis points delivered during the height of the 2008-2009 global crisis.



The central bank has held the 7-day repurchase agreement rate for the past three months in a row and meets again on Oct. 13.