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S.Korea KDI cuts 2008 growth forecast

Reuters - Monday, May 12

SEOUL, May 12 - South Korea's top research agency on Monday cut its 2008 growth forecast for Asia's fourth-largest economy and said inflation would be a 7-year high, underlining official concerns about the outlook as global momentum stumbles.

The Korea Development Institute forecast 2008 growth at 4.8 percent, which would be the lowest since 2005, from its previous forecast of 5.0 percent. It slashed expectations for private consumption by a third.

Analysts said the downgrade in the forecast wasn't severe enough to sway the debate over how the central bank might deal with the prospects of slowing growth and strengthening inflation.

"The 4.8 percent growth is not a number which needs a rate cut, as it suggests the economy would not be that bad amid deepening concerns over a higher inflation," said Kim Jae-eun, an economist at Hana Daetoo Securities.

Equally though, the economy still faces risks, so a rate cut later in the year wasn't out of the question, Park Sang-hyun, chief economist at CJ Investment & Securities, said.

"It is unclear it will meet 4.8 percent, given higher oil prices. So, we still have a card of a rate cut on the table," he said.

South Korea's financial markets were closed for a holiday marking Buddha's birthday on Monday.

Like other countries globally, South Korea faces record high oil prices above $126 a barrel and soaring food costs, including for staples such as rice. In addition, weakening demand from the United States following its housing downturn is undermining global growth.

Last week, South Korea's central bank held its key interest rate steady at 5 percent, citing concerns about inflation -- currently close to its highest in four years at 4.1 percent -- and resisting government pressure for cheaper borrowing costs to bolster the economy. [KROCRT=ECI]

Bank of Korea Governor Lee Seong-tae said last week it would be difficult for the economy to grow more than 4.5 percent this year after 5.0 percent expansion last year.

The country's president entered office this year promising 6 percent growth, a target his officials admit looks almost impossible to achieve.

The KDI said in a statement that short-term monetary policy should aim to keep inflation within the mid-term target, although it noted the need to boost domestic demand.

The Bank of Korea has a target to keep inflation on average in a range of 2.5 percent to 3.5 percent during 2007-2009. Annual inflation has overshot the target for five straight months.

The KDI said it expected consumer prices to rise 4.1 percent in 2008, the fastest pace since a similar rate in 2001 as a weaker won pushed up import prices.

The KDI said it was necessary for the won to absorb the impact of "overseas shocks," which analysts said implied a preference to allow won appreciation.

The currency is down 10.4 percent against the dollar so far this year. It hit its weakest level in more than two and a half years on Friday.

CUTS DOMESTIC DEMAND F'CAST

The KDI said it slashed its forecast for growth in private consumption this year to 3.0 percent from a forecast in October of 4.5 percent. That compared with a rise of 4.5 percent in 2007.

The KDI also lowered its 2008 capital investment growth forecast to 2.4 percent from a previous 6.2 percent. Last year, capital investment rose 7.6 percent.

"Our economy appears to be at the juncture of turning into a modest slowdown after wrapping up an expansion by the end of the last year," the agency said in a statement.

Although it saw a weak won fuelling inflation, it suggested the currency would cushion the current account.

It upgraded its 2008 current account deficit forecast to $600 million from a previous $2.6 billion deficit and raised its goods export growth expectation to 18.4 percent from 10.9 percent.

It revised up its goods import growth forecast to 23.3 percent from 13.2 percent due to rising oil and raw material prices.

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