(Updates with finance minister comments, markets)
By Cheon Jong-woo
SEOUL, March 5 (Reuters) - South Korea warned on Thursday it was ready to intervene when the currency market "overshoots" as fresh forecasts suggested the country's all-important exports will keep falling.
The Finance Ministry, in its Green Book of preliminary economic indicators, said that March would see a small trade surplus but only because even weaker imports would offset the slump in exports, which normally account for about two-thirds of economic activity.
The slump in exports has helped fuel a near 20 percent fall
in the won
Traders said the authorities would continue to intervene to support the ailing currency, though they saw little chance of any change in direction.
Vice Finance Minister Hur Kyung-wook said the government's policy is to intervene when the currency market "overshoots". The won had dropped partly because traders had overreacted to the country's foreign debt burden.
"The government believes that in principle the foreign exchange rate should reflect economic fundamentals and the currency demand and supply situation," Hur said.
"The government's basic stance is to step into the market and carry out smoothing operations whenever necessary," he said.
Authorities were not spotted selling dollars on Thursday
when the won fell 1 percent to 1,567.1/8.8 per dollar compared
with Wednesday's domestic close of 1,551.0
He declined to confirm if authorities had sold around $1.5 billion in intervention in the past two days.
Finance Minister Yoon Jeung-hyun, who had said a weak won was not necessarily a bad thing, said the government was closely watching market volatility. But he declined to say if the current won level reflected fundamentals.
Yoon said no decision had yet been made about issuing at least one sovereign bond in the first half, a plan previously flagged by officials.
"The need to intervene is growing as a weaker won keeps denting domestic demand. We need to see growth from domestic demand for an overall recovery," said Kim Jae-eun, an economist at Hana Daetoo Securities.
DOMESTIC DEMAND PRESSURE
In February, South Korean consumer prices rose 4.1 percent from a year ago, after 3.7 percent growth in January, marking the first increase in the inflation rate in seven months.
Higher inflation bites into consumers' real income and will put further pressure on domestic demand, economists say.
Reflecting weaker private consumption, sales at major department stores in February dipped 0.4 percent from a year ago after rising 10.4 percent in January, the finance ministry said.
With dwindling domestic demand, the ministry said lower raw material prices were expected to help the country offset slumping exports amid a global recession and post a "small" trade surplus.
The economy is slowing further after a sharp contraction in the fourth quarter of 2008 on weakness in both exports and domestic demand, it said.
The evaluation came as Premier Wen Jiabao assured that China, South Korea's top export market, would achieve 8 percent growth this year despite a deepening financial crisis, pointing to export support and spending programmes to shore up the economy.
The won, whose drop this year follows a 26 percent loss in 2008, has been hit recently by investors' concerns about South Korea's ability to refinance its maturing foreign debt in the face of growing global financial turbulence.
South Korea had $194 billion of foreign debt falling due this year and $201.2 billion of foreign reserves at the end of 2008, but has said it was not obliged to pay back $40 billion of the total that was linked to currency hedging by companies.
The government is planning a supplementary budget, details of which are likely to be announced in April.
Some analysts have speculated it will be in the region of 20-30 trillion won ($13-19 billion), or around 10 percent of this year's budget. Some local media reports have put it as high as 50 trillion won. ($1=1547.8 Won) (Additional reporting by Jonathan Thatcher and Yoo Choonsik, editing by Jonathan Hopfner)