Page last updated at 10:43 GMT, Friday, 9 January 2009

S Korea cuts rates as woes deepen

A South Korean currency trader in the Korea Exchange Bank on Thursday
South Korea's export-driven economy has been badly hit by the downturn

South Korea's central bank has slashed interest rates by half a percentage point to a record low of 2.5%, in the latest attempt to fend off recession.

The bank warned that economic activity was "slackening at a rapid pace".

President Lee Myung-bak has warned that the country's target of 3% growth in 2008 could prove unattainable.

The latest victim of the downturn is the country's fifth biggest carmaker, Ssangyong Motor, which said on Friday it had applied for court receivership.

The company - majority owned by China's Shanghai Automotive Industry Corporation (SAIC) - specialises in sports utility vehicles and reported sales in December were down 53% on the previous year.

The court application came after Ssangyong's main creditor, the state-run Korea Development Bank, refused to extend new loans to the company unless SAIC also provided new funding, which it has refused to do.

The court has one month to consider Ssangyong's application and if it decides the business is still viable it will appoint a new management team to take over.

Exports plummet

This cut in the interest rate is the fifth in three months. The rate has fallen from 5.25% in that time.

"Domestic economic activity is slackening at a rapid pace," the Bank of Korea said in a statement.

"The sluggishness of domestic consumption and investment has deepened further and exports have decreased significantly owing to the worldwide economic slowdown."

South Korea - among the world's leading economies - is export-driven and has been hit by the fall in global consumer demand, with exports seeing double-digit percentage drops in both November and December. Factory output fell 14.1% in November.

'Gloom ahead'

President Lee has now joined the Bank of Korea in cautioning that the country could fail to hit its 3% growth target for the year.

But the predictions from some economists are much worse, with some suggesting the Korean economy may experience its first annual contraction since the Asian financial crisis of 1997. Some suggest the economy could shrink by 3%.

President Lee was elected a year ago on a "747" plan, which pledged to achieve 7% economic growth, double the average annual per capita income to $40,000, and make the Korean economy the world's seventh largest. He has since backed away from the pledge.

On Friday he expressed concern about the impact of the downturn on ordinary Koreans' lives, the presidential Blue House said.

In addition to interest rate cuts, a 50 trillion won ($37bn; 24bn) fund has been established to help cash-strapped small and medium-sized businesses, according to the local news agency Yonhap.

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