Falling exports put Korean recovery on shakier ground

South Korea's September exports posted their biggest annual drop in seven months while consumer inflation eased to a 14-year low, likely keeping the policy rate near record lows as a firm recovery for the trade-dependent nation looks far from assured.

With Europe still in the doldrums, China's growth-rebound in its infancy and the United States gearing to turn off the tap on cheap dollars, Asia's fourth-largest economy faces an uncertain outlook.

Data released by the Ministry of Trade, Industry and Energy yesterday showed that overseas shipments last month fell 1.5 per cent from a year earlier, the sharpest contraction since February. This was weaker than a 2 per cent rise forecast in a Reuters survey of economists and the 7.7 per cent rise in August.

Annual inflation eased to 0.8 per cent, its weakest level since September 1999 and slipping further below the central bank's 2.5-3.5 per cent target band. The inflation reading was also weaker than any individual forecast in a Reuters survey of economists.

"Construction investment and domestic consumption are all suffering," said Kiwoom Securities analyst Ma Ju-ok. "If you don't have demand then it will be hard for inflation to pick up."

The economy's pedestrian growth rate was underlined this week when President Park Geun-hye backed away from a pledge to balance the budget within her five-year term, as tax revenue is expected to fall seven trillion won (HK$50.42 billion) to eight trillion won short of the target.

Moreover, the jolt to the economy from this year's 5.3 trillion won government stimulus package is expected to fade in the fourth quarter, while policymakers and economists say the firm August industrial output data released on Monday will not be enough on its own to suggest a full recovery.

All of this means the Bank of Korea will likely keep the benchmark rate at a near historical low of 2.5 per cent well into next year. The central bank, which last eased the policy rate by 25 basis points in May, made no move last month for the fourth consecutive month.

While the bank has given no indications that it is contemplating any near-term moves, some analysts say that another rate cut cannot be ruled out.

"I believe that a rate cut is possible once a new Bank of Korea governor takes office," SK Securities analyst Yum Sang-hoon said. Governor Kim Choong-soo's term ends in March next year.

Although most do not expect the bank to cut rates again, dealers say authorities have been quite active in the currency market, intervening to keep the won from rising too sharply to minimise erosion of price competitiveness for local exporters.

The economy has also been recovering in recent quarters, but analysts remain sceptical that the government's 3.9 per cent growth forecast for next year is achievable.

Sequential gross domestic product growth for the second quarter accelerated to 1.1 per cent from 0.8 per cent in the January-March quarter, and expectations are that the impact of the government's stimulus will likely see firm growth for the July-September period as well.