Monday, June 2, 2008

Korea Inflation May 2008

South Korean hopes for lower interest rates have been significantly reduced by the latest government figures showing that inflation surged to a seven-year-high last month on rising commodity prices and the weaker won.Consumer prices rose 4.9 per cent in May from a year earlier, after climbing 4.4 per cent in April, well above the Bank of Korea’s target range of between 2.5 per cent and 3.5 per cent.

The weaker won – it has depreciated more than 10 per cent against the dollar this year – is adding to pressure on policymakers, who are struggling to tame inflation as record-high oil prices dent economic growth. South Korea is the world’s fifth-largest importer of crude oil.

High inflation is dampening consumer spending in Asia’s fourth-largest economy, although the country is holding up relatively well due to robust exports. Exports were up 27.2 per cent at $39.5bn (€25.4bn, £20.1bn) in May from a year ago, while imports grew 28.8 per cent to $38.5bn, resulting in a trade surplus of $1bn – the first positive figure in the past six months. The increase was driven by strong demand for Korean ships, mobile phones and flat screens from emerging economies such as China and those in the Middle East.

The South Korean economy grew 5.8 per cent in the first quarter from a year ago.

Thursday, May 1, 2008

South Korea Exports March 2008

South Korea’s exports grew at their fastest pace in more than three years in April, as strong demand from emerging markets and a weaker local currency offset the impact of a US economic slowdown. Exports, which make up about 40 per cent of South Korea’s gross domestic product, shot up 27 per cent last month from a year earlier, exceeding March’s 18.6 per cent rise, according to figures released on Thursday.

Diversified markets and export products helped Korea weather cooling demand from the US and Europe, according to the latest data.

Exports to the Middle East jumped 43.9 per cent in the first 20 days of April and those to Latin America and China climbed by 28.5 per cent and 17.9 per cent respectively, while shipments to the US and Europe fell by 0.9 per cent and 2.5 per cent respectively.

The strong rise in exports comes as a relief to the new government, which is sticking to its 6 per cent target for economic growth despite the slowing global economy. But it adds to the dilemma confronting the Bank of Korea, which is under pressure to cut interest rates to boost sluggish domestic demand even as inflation rises.

The BoK is to hold its next monetary policy board meeting May 8. Thursday‘s strong export data is expected to ease pressure for the central bank to cut rates this month as consumer prices rose 4.1 per cent in April, above its 2.5-3.5 per cent target range.

Friday, April 25, 2008

South Korea GDP Growth Slows in Q1 2008

South Korea’s economy grew at its slowest pace in more than three years in the first quarter of 2008 as domestic demand cooled, increasing the prospects of a near-term rate cut by the central bank. The economy expanded 0.7 per cent from the previous quarter, when it grew 1.6 per cent, the Bank of Korea said on Friday. Year on year, growth was 5.7 per cent, euqal to the rate in the previous quarter.

Rising fuel costs combined with a deteriorating outlook for exports prompted companies to reduce investment, while record household debt is sapping consumer buying power.

The near-term outlook does not seem to be too positive with the government expecting exports, which constitute 40 per cent of GDP in what is Asia’s fourth-largest economy, to slow in coming months as the global economy cools.

Domestic demand, which includes private and corporate spending, rose only 0.1 per cent IN Q1 - the slowest pace since the third quarter of 2004 - with growth in private consumption slowing to 0.6 per cent and corporate investment falling 0.1 per cent. Exports increased 12.8 per cent from a year earlier, down from a 17.7 rise the pevious quarter. Real gross domestic income, a measure of purchasing power, fell 2.2 percent from the previous quarter, when it rose 0.3 percent. That's the biggest drop since the fourth quarter of 2000.

Companies are beginning to scale back spending. Investment in new facilities fell 0.1 percent, after a 2.1 percent gain in the fourth quarter. Construction investment dropped 1 percent after a 1.2 percent increase.

The value of South Korea's shipments overseas fell 1.1 percent in the quarter from the previous period as prices for semiconductors declined. From a year earlier exports climbed 12.8 percent. Still, Choi Chun Sin, head of the central bank's statistics department, said that while the central bank expects export growth to slow, overseas shipments would still record "double-digit" growth for the rest of the year. Export climbed 31.5 percent during the first 23 days of April from the same period a year ago.

The outlook has worsened since January, when the Finance Ministry forecast consumer spending and construction investment would replace exports as the main drivers of economic growth. South Korea's jobless rate rose in March as builders and manufacturers shed workers, offering yet another signal that the economy's nine-year expansion is slowing. The number of people employed in the construction sector fell 1.9 percent from a year earlier and employment in manufacturing dropped 0.5 percent.

Unemployment edged up to 3.1 percent from 3 percent in February, the statistics office said today in Gwacheon.

These numbers are expected to add to pressure on the government to introduce measures to boost the economy. Kang Man-soo, finance minister, is quoted as saying this week that it would be difficult for the government to achieve the 7 per cent growth target for this year and stressed the need for a supplementary budget. He is urging the use of about Won4,900bn of tax revenue carried over to this year to build social infrastructure, something lawmakers from the ruling party strongly oppose.

Signs of a slowdown have been emerging as the pace of inflation accelerated to the fastest in more three years and the U.S. housing recession damps global growth.

In March, the leading economic index fell for a third month and the number of new hires declined to a three-year low. Retail sales slowed in February and factory output fell for a second month.

Consumers turned pessimistic for the first time in a year last month and manufacturers' confidence declined from a three- month high.

Meantime, the cost of servicing debt is rising. Lending by South Korean banks to households last month took the level to a record 367 trillion won, and the average lending rate stood at 6.95 percent in February, up from 6.28 percent a year earlier, according to the central bank.

The central bank has kept interest rates at 5 per cent for the past eight months but the BoK governor last month hinted at a rate cut soon, saying he was more worried about a slowing economy than inflation. Inflation hit a 3-year high of 3.9 per cent in March, above the central bank’s target range of 2.5 per cent to 3.5 per cent. The central bank left the seven-day repurchase rate unchanged at 5 percent on April 10. The bank last changed borrowing costs in July and August last year when it made quarter-point increases. Policy makers next meet on May 8 to review rates.

Meantime the won has strengthened, and is heading for its biggest weekly gain in three weeks as a rally in stocks spurred overseas investors to increase holdings of the nation's assets. Bonds are also set for a weekly gain.

The currency strengthened almost 1 percent this week, making it the best performer among the 10 most-traded Asian currencies outside of Japan. Korea's currency rose 0.5 percent to 991.25 against the dollar as of 10:03 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. Overseas investors bought more Korean shares than they sold every day of the week except one. The benchmark Kospi index climbed 1.4 percent.

Tuesday, April 1, 2008

South Korea Exports and Trade Deficit March 2008

South Korea's exports accelerated sharply in March on the back of rising shipments of oil products, cars and mobile phones to Asia and Latin America. Overseas shipments rose 19.1 percent from a year earlier, quickening from February's 18.8 percent gain, the economics ministry said in Gwacheon today.

Increased shipments to China and emerging markets have helped exporters to withstand faltering sales to the U.S., where the economy may be in a recession. Still, South Korean factory output fell in February and manufacturers' confidence for April deteriorated, reports showed yesterday, signaling companies expect demand may slow.

Commenting on the general situation in South East Asia, Vikram Nehru, the World Bank’s chief economist for east Asia and the Pacific (ie not including Japan and Australia), said on Tuesday the shift in export orientation was taking place faster than expected. “I didn’t expect such a rapid shift towards non-US markets as we are seeing,” he told the Financial Times yesterday "That is a sign of very adept marketing, as exchange rates and incentives change."

While annual export growth from emerging east Asian nations initially slowed from 22 per cent in January of last year to 15-16 per cent in the third quarter, it has since rebounded to 18-19 per cent.

The World Bank also said more sophisticated domestic production was allowing China to source more of its input needs internally.

“If this trend continues and if other east Asian economies are able to exploit these new opportunities in China’s domestic market then, over time, China is also likely to become an increasingly independent growth pole for the rest of east Asia,’’ the bank said.

Exports advanced to $36.2 billion in March and imports gained 25.9 percent to $36.9 billion, today's report showed. But Korea also posted a trade deficit of $668 million, the fourth consecutive shortfall. However, the March deficit was smaller than that in the first two months of 2008 as soaring oil prices reduced oil imports to 72 million barrels per day, down 10.8 percent from February. South Korea had previously enjoyed a monthly trade surplus for a number of years before starting to generate a deficit in December 2007.

Exports to China climbed 31.5 percent and sales to the European Union gained 21.4 percent in the 20-day period, outpacing a 10 percent increase in shipments to the U.S. China is South Korea's largest overseas market, buying 22 percent of exports. Manufacturing activity in China, the world's fastest-growing major economy, accelerated in March, a survey of purchasing managers showed recently.

South Korea's exports to central America and South America surged 49.6 percent in the first 20 days of last month from a year earlier, today's report showed. Shipments of oil products jumped 83.4 percent in the first 20 days of March and exports of mobile phones gained 48 percent. Exports of cars rose 28.5 percent in the 20-day period.

The Kospi index has dropped 10 percent and the won has fallen 5.8 percent this year on growing concern fallout from the U.S. housing recession and global credit-market slump will cool economic growth in coming quarters.

The 2008 trade surplus is likely to ``miss'' the government's target of $13 billion because of rising oil prices, Oh Jung Kyu, director general for trade and investment at the ministry told reporters in Gwacheon today. Import costs have increased as the price of Dubai crude oil, an Asian benchmark, surged 70 percent since the start of 2007. South Korea buys 97 percent of the fuel it needs from overseas.

South Korea Inflation March 2008

Consumer prices accelerated slightly in March even as industrial production, investment and consumption are weakening. According to the National Statistics Office (NSO), consumer prices rose 3.9 percent in March over March 2007, up from a 3.6 percent gain in February, as surging crude oil and other international raw material prices raised costs of goods and services in Korea.

Seasonally adjusted inflation rose 0.9 percent from a month earlier, the largest increase since January 2005 when the month-on-month inflation jumped 1 percent. The 3.9 percent year-on-year growth is above the Bank of Korea's target range of 2.5 percent to 3.5 percent. The government is committed to trying to contain rises in consumer prices to below 3.3 percent this year.

Consumers felt the inflation burden more heavily last month since the cost of living index, consisting of food and other daily necessities, increased at 4.9 percent from a year ago, according to the statistical office. Manufacturing goods were up 6.3 percent, reflecting a steep rise in raw material costs, while prices of agricultural, fisheries and livestock goods fell 1.3 percent.

According to the statistical office, industrial output grew 10.1 percent in February from a year earlier, down from an 11.3 percent gain in January. Growth was lower than the market consensus of 12 percent and seasonally adjusted production fell 0.2 percent from a month earlier. Retail sales expanded 3 percent from a year earlier, down from a 4.6 percent year-on-year gain the previous month, while corporate facility spending on machinery and telecommunications declined 1.9 percent and orders received by construction companies also fell 6.2 percent.

Monday, March 31, 2008

South Korea Industrial Output February 2008

South Korea's industrial production unexpectedly fell for the second time in three months in February, indicating economic growth may be cooling. Output declined 0.2 percent from January, when it jumped 2.5 percent, the National Statistical Office said today in Gwacheon.

According to the National Statistical Office (NSO) Monday, although industrial output fell month on month it still grew by a healthy 10.1 percent year on year rate in February on increasing production of semiconductors and audio and visual equipment. This compared with an 11.3 percent year on year gain in January.

Service output also increased at a slower rate of 5.9 percent in February from a year ago, down from a 6.8 percent growth the previous month. The finance and insurance sector saw output increase by 15.4 percent, but those of entertainment and sports-related sectors and educational service businesses fell by 3.4 percent and 3.3percent, respectively.

Tuesday, March 11, 2008

How Far May the Won Fall in 2008?

South Korea's won may fall considerably in the first half of 2008 as global credit-market losses lead overseas funds to sell holdings in Korean stocks according to a report out this week from State Street Global Markets.

The 3.1 percent drop so far this month in the Won's value vis a vis the dollar make it the world's worst currently performing major-exchange rate. Many economists consider that the decline will continue if the current-account deficit widens and the funds from stock sales continues.

Overseas investors have sold more Korean shares than they bought nearly every day this year on concern slowing global economic growth will damp demand for exports. Korea's won and the Indian rupee are the only two of Asia's 10 most-traded currencies outside of Japan that have weakened versus the dollar in 2008.

Cross-over equity flows, or purchases of stocks by overseas investors, into South Korea are the second weakest among the 29 developed and emerging-markets economies tracked by State Street Global Markets, the world's largest institutional money manager, and Korea's stock index has slipped 14.1 percent so far this year.

Korea's currency fell 1 percent this morning to 974.45 per dollar as of 1:41 p.m. local time, and this was the biggest decline since last August with the won reaching its lowest level since March 2006.

Korea's current-account is expected to run a $7 billion deficit this year according to the finance ministry yesterday, a figure which is twice the central bank's $3 billion forecast. Growth will fall short of 5 percent in 2008 and an earlier estimate of 6 percent because of slowing shipments abroad, Finance Minister Kang Man Soo said last week.

Friday, March 7, 2008

South Korea Central Bank Keeps Interest Rates Unchanged March 2008

South Korea's central bank kept its interest-rate policy unchanged for a seventh month today, citing increasing inflation pressures and the deteriorating global economic outlook.

Governor Lee Seong Tae set the seven-day repurchase rate at 5 percent.
The yield on South Korea's five-year government bond rose 4 basis points to 5.09 percent, reversing an earlier decline.

The won traded at 957.50 per dollar at close of onshore trading in Seoul, little changed from before the decision and posting its biggest weekly loss in seven months. The main Kospi index of shares slumped 2 percent to 1,663.97.

Consumer prices rose 3.9 percent in January from a year earlier, the fastest pace in more than three years. Inflation slowed to 3.6 percent in February. The Bank of Korea in December forecast consumer prices to rise 3.3 percent this year.

Export growth accelerated in February, rising by 20.2 percent, and industrial output increased 2.5 percent in January from December. Expanding demand from China, the Middle East and other emerging markets helped protect Korea's exports from the slowdown in several industrialized economies.

Other figures suggest growth may have peaked after gross domestic product expanded at the fastest annual pace in almost two years in the fourth quarter. Corporate investment fell, inventories rose, and a leading index weakened for a second month, the March 4 production report also showed. The Kospi index has plunged 12 percent this year.

The central bank, which expects prices to moderate in the second half, aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009.

Thursday, February 28, 2008

South Korea January 2008 Current Account Deficit

South Korea experienced its biggest monthly current account shortfall in almost 11 years in January and may have to enlarge its deficit forecast for the whole year, the central bank said on Thursday.

The seasonally adjusted current account deficit widened to a provisional $2.03bn in January, the biggest since a $2.21bn loss in February 1997, from a revised $1.07bn deficit in December 2007, the Bank of Korea data showed.

The deficit, which has been swollen by the rising cost of commodities imports just as exports started to slow, means foreign trade will contribute less than before to the economy at a time when the economic outlook is already turning from bad to worse.

In seperately released data we learnt today that companies were growing more worried about the immediate future, with the Korea Chamber of Commerce and Industry’s sentiment index for the second quarter hitting the lowest in more than a year. The chamber’s index, which fell to 97 for the second quarter from 99 for the first quarter, came hours after the central bank’s March survey index for manufacturing firms stood steady at a 9-month low of 86 set in February.

President Lee’s government has already pledged to lower corporate taxes, cut domestic sales taxes on oil products and roll back regulations to boost investment, but the effect will most likely be limited because key risks are from abroad.

The worsening current account performance is negative for the won, which has already been in gradual decline against the dollar since hitting a decade high at the end of October last year.

Yang Jae-ryong, who is head of the Bank of Korea’s international balance of payments team, told reporters that Korea’s current account deficit for 2008 could top the $3bn level previously forecast earlier by the central bank. If this happens it will be the first annual current account deficit in 11 years for South Korea, which has enjoyed a healthy current account performance helped by the won’s sharp drop during the 1997-98 financial crisis. This data comes one week before the central bank reviews interest rates on March 7. The Bank of Korea held rates steady at 5.0 per cent on Feb. 13 for a sixth consecutive month but said it could cut the rates whenever necessary.

Friday, February 1, 2008

South Korea Inflation January 2008

South Korea's inflation accelerated in January to its haighest level in more than three years as costs of industrial goods and fuel rose following a surge in crude oil prices. The consumer price index rose at an annual 3.9 percent rate, as compared with a 3.6 percent increase in December according to data released by the statistics office today. The increase was the largest since September 2004. month on month prices were up 0.5 percent in January from December.

Bank of Korea Governor Lee Seong Tae said recently that inflation is expected to accelerate even as the risk of a U.S. recession increases.

According to the central bank half yearly economic outloook released in December consumer price inflation is expected to accelerate to 3.3 percent in 2008 from 2.5 percent in 2007. The central bank aims to keep inflation between 2.5 percent to 3.5 percent target range.

The central bank's policy board members next meet on Feb. 13 to decide on interest rates. In January the bank kept the overnight call rate unchanged for a fifth month at a six-year high of 5 percent, after back-to-back increases in July and August.

Core consumer prices, which exclude oil and other volatile items, rose 0.6 percent from December, and core prices were up 2.8 percent from January 2007.

Industrial goods prices rose 0.7 percent from December, boosted by a 1.8 percent gain in oil product costs, while the cost of agricultural, dairy and fisheries goods rose 0.2 percent over the month.

S Korea Trade Deficit Hits 11-year High

South Korean exports in January grew more than expected in spite of a slowing US economy but firmer oil prices pumped the trade deficit up to the biggest in 11 years, data showed on Friday, dealing a blow to the won. Exports jumped 17.0 per cent led by oil products, flat-screen panels, machinery and mobile phone handsets, the Commerce Ministry data showed.

But a larger 31.5 per cent rise in imports – led by crude oil and topping market expectations for a 24.5 per cent gain – pushed the trade deficit up to its widest since early 1997, forcing the won to give up gains and weaken against the dollar.

South Korea’s longstanding efforts to diversify its export markets away from the US into emerging economies had been helping Korea maintain strong sales abroad until now, despite growing troubles in the US economy.

Exports in January amounted to a provisional $32.86bn on a customs-clearance basis and imports totalled $36.24bn, generating a deficit of $3.38bn, the data showed.

The import growth was at its fastest pace since a 33.8 percent annual gain in August 2004 and the trade deficit was its biggest since a $3.48bn gap in January 1997. The price of Dubai crude oil, South Korea's benchmark, jumped 53 percent since the beginning of last year. South Korea purchases 97 percent of its energy needs from overseas.

The won was trading at 944.1/8 per dollar at 0134 GMT, turning weaker from an earlier rise to as high as 941.6. South Korea is the region’s first major economy to release monthly trade data each month, making the country’s trade figures an important clue on the latest state of global demand.

Exports to China, the country's largest market, gained 5 percent in the first 20 days of last month while exports to the European Union jumped 36.1 percent. Shipments to the U.S., the second largest, rose 3.3 percent and exports to Russia climbed 21 percent, today's report showed. South Korea sends two-fifths of its total exports to China and the US, while electronics goods and cars account for about 45 per cent of the total exports in value.

China's economy, the destination of about a fifth of South Korea's shipments, expanded more than 11 percent in each of the past four quarters. By contrast, U.S. gross domestic product slowed to an annual rate of 0.6 percent in the fourth quarter from 4.9 percent in the previous three months.

The trade data came hours before the South Korean government is due to release January consumer inflation data. Both sets of numbers will provide an important feed into the Bank of Korea’s interest rate review on Feb 13.

Friday, January 25, 2008

South Korea GDP Growth Q4 2007

South Korea’s economy grew faster than expected in the final quarter of 2007, driven by increased corporate investment and a recovery in domestic consumption, the Bank of Korea said today. Korea's gross domestic product rose a seasonably adjusted 1.5 per cent in the October-December period, Up from 1.3 per cent in the previous quarter.The economy expanded 5.5 per cent from a year earlier, the fastest pace in almost two years.

The robust growth was propelled by stronger corporate spending with corporate investment in factories surging 4.4 per cent in the last quarter, reversing the third quarter’s drop. Increasing consumption also contributed to economic growth with private consumption rising 1.1 per cent.

Exports remained resilient in the final three months of 2007 thanks to strong demand from China. Exports jumped 7.3 per cent, accelerating from a 1.5 per cent growth in the third quarter. It was the biggest increase since the final quarter of 2003.

Shipments to China, South Korea’s biggest export market, soared 18 per cent from January 1 to December 20 and exports to the Middle East jumped almost 40 per cent.

The central bank is likely to come under growing pressure to cut interest rates as higher oil prices and grwoing problems in the US economy and Europe are expected to threaten export growth. The principal problem is that the bank has little room to cut interest rates due to rising inflation.

The central bank has forecast that growth in Asia’s third-largest economy will slow to 4.7 per cent this year, much lower than President-elect Lee Myung-bak’s growth target of 6 per cent. The economy expanded 4.9 per cent last year from the previous year’s 5.0 per cent growth.

Sunday, January 6, 2008

FDI in Korea 2007

Planned foreign direct investment into South Korea fell for the third consecutive year in 2007, the commerce ministry said on Sunday, raising little hope that the situation would change in 2008. New FDI commitments fell 6.5 per cent to $10.5bn in 2007, although the figure for the fourth quarter increased 12.6 per cent over the previous year to $4.19bn. The ministry forecast steady FDI inflows of around $10bn (€6.8bn, £5.1bn) for 2008

“The appreciating won and slowing economic growth in the US and other developed nations remain as negative factors,” the ministry said in a statement.

The shrinking FDI plans underline China's emergence as a magnet for foreign investment. The investment climate in South Korea has also deteriorated as a result of increasing scrutiny of foreign capital and new regulations against hostile takeovers. South Korea has welcomed greenfield investment by foreign investors but there is increasingly hostile public sentiment towards foreign buyers.

South Korea’s outgoing government plans to revise foreign investment regulations to make exclusions on national security grounds more specific and provide stronger protection for major Korean companies targeted by overseas investors.

Pledged FDI in the manufacturing sector slumped 36.7 per cent last year to $2.69bn but rose by 14.9 per cent to $7.61bn in the service sector. Despite the US subprime loan crisis, planned FDI from the US rose 37.2 per cent to $2.34bn but FDI commitments from Japan dropped by 53 per cent to $990m and those from the European Union fell 13 per cent to $4.33bn.

There are some hopes that foreign investment could rebound this year as the next government is expected to adopt more investor-friendly policies. President-elect Lee Myung-bak, who takes office on February 25, has pledged to boost economic growth by attracting more foreign investment and encouraging corporate investment. But here, as in so many other cases, the proof of the pudding will be in the eating.

Friday, January 4, 2008

South Korea Debtor Bail Out Plan

South Korea’s incoming government is planning a huge bail-out covering 7.2m consumer debtors behind on loan repayments or with poor credit ratings in an effort to spur consumption and prevent a repeat of a 2004 consumer credit crisis.

President-elect Lee Myung-bak, an ex-Hyundai executive, promised help for consumer debtors during the campaign leading up to last month’s presidential election. Economists have warned that South Korean households and small companies are facing a growing risk of default amid rising interest rates and a credit squeeze at the country’s banks.

But South Korea’s top financial regulator, the Financial Supervisory Commission, took things a step forward on Thursday when it outlined a bail-out plan to Mr Lee’s transition team.

Under the plan, credit delinquents with a small amount of debt will have their interest payments reduced and repayment deadlines extended. Their credit records will also be cleared.

Chang Su-man, a member of the transition team’s economic subcommittee, said the timing and the details of the plan have not yet been decided and it still required extensive discussions.

“There is no exact data about how much it will cost, but the plan will be implemented because it is one of Mr Lee’s main campaign promises,” Mr Chang said.

Local newspapers said the planned measures could cost the government about $11bn. Mr Chang declined to confirm that, but pointed out that that would be a small amount given that Seoul has spent $179bn to bail out struggling financial institutions and companies since the 1997-98 Asian financial crisis.

The number of South Korean credit delinquents has fallen significantly since the government rescued about 1m debtors in 2004 after the bursting of a credit card bubble left banks with bad debts.

Debtors with more than Won500,000 ($534) owed and more than three months behind on their payments stood at 2.7m at the end of June, down from a peak of 3.72m in 2003. But, according to finance ministry figures, some 7m South Koreans with poor credit ratings also owe about Won18,000bn in total.

Critics said the forthcoming plan could cause serious moral hazard and hurt the country’s banks, although Lim Ji-won, an economist at JPMorgan, called it a “pre-emptive” measure as the number of defaults was likely to rise with interest rates.

Thursday, January 3, 2008

Seoul Attack It's Home Grown Sub-Prime Problem

South Korea’s incoming government is planning a huge bail-out covering 7.2m consumer debtors behind on loan repayments or with poor credit ratings in an effort to spur consumption and prevent a repeat of a 2004 consumer credit crisis. President-elect Lee Myung-bak, an ex-Hyundai executive, promised help for consumer debtors during the campaign leading up to last month’s presidential election. South Korean households and small companies are facing a growing risk of default amid rising interest rates and a credit squeeze at the country’s banks.

But South Korea’s top financial regulator, the Financial Supervisory Commission, took things a step forward on Thursday when it outlined a bail-out plan to Mr Lee’s transition team. Under the plan, credit delinquents with a small amount of debt will have their interest payments reduced and repayment deadlines extended. Their credit records will also be cleared.

Local newspapers are saying that the planned measures could cost the government about $11bn.

The number of South Korean credit delinquents has fallen significantly since the government rescued about 1m debtors in 2004 after the bursting of a credit card bubble left banks with bad debts.

The number of debtors with more than Won500,000 ($534) owed and more than three months arrears on their payments stood at 2.7m at the end of June, down from a peak of 3.72m in 2003. But, according to finance ministry figures, some 7m South Koreans with poor credit ratings also owe about Won18,000bn in total.