| ||||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
|
Country Commercial Guides for FY 2000: Korea
Report prepared by U.S. Embassy Seoul, released July 1999
Note* |
CHAPTER II. ECONOMIC TRENDS AND OUTLOOKMajor Trends and Outlook
In November 1997, Korea followed Thailand and Indonesia in suffering a loss of international confidence, resulting in a severe foreign exchange liquidity crisis. The Korean won lost over 50% of its value against the dollar by the end of 1997, dropping to nearly 1,700 won per dollar, and Korea's foreign currency reserves dropped to dangerously low levels. In December 1997, Korea signed an enhanced $58 billion IMF package, including loans from the IMF, World Bank, and the Asia Development Bank. Under the terms of the IMF program, Korea agreed to accelerate the opening of its financial and equity markets to foreign investment and to reform and restructure its financial and corporate sectors to increase transparency, accountability and efficiency. Korea's usable foreign currency reserves subsequently grew to $60.4 billion by July 1999, and the won appreciated to around 1,160/dollar. Since his election in December 1997, President Kim Dae Jung has stressed the need to attract foreign investment and to reduce barriers to both investment and trade. The reforms enacted and/or proposed by Korea are expected to accelerate the evolution of Korea's financial and corporate sectors away from the previous state-directed model towards a free-market, commercial basis.
Korea's GDP shrank 5.8% in real terms in 1998, the worst performance since the Korean War. Unemployment rose steadily to peak at over 8% in early 1999, with nearly 1.8 million people unemployed, another half-million working less than 18 hours/week, and the employed population falling 1.5%. Compensation levels dropped significantly for many people who remained employed. Corporate investment in facilities and capital fell almost 40% in the first four months of 1998, and consumption fell 8.2%. Merchandise exports fell 2.2% in 1998 due to weak demand in Asian economies, a cutback in financing for trade and operations, and restructuring and bankruptcies among exporters. Merchandise imports fell 35.5% due to plunging domestic consumption and investment in 1998. Korea ran a trade surplus of $39 billion in 1998, and a current account surplus of $40 billion.
The Korean economy is rebounding more quickly than expected in 1999, with GDP expected to rise 5%-6% based on increasing domestic consumption and investment. Unemployment began to decline in March 1999, and while most of the decline was due to seasonal factors involving construction and agriculture, seasonally adjusted unemployment also declined slightly to 6.4% in May. The number of newly-established firms rose steadily each month in 1999, exceeding the number of bankrupt firms by a factor of 10 or more. Wages and income also showed some recovery in the first four months of 1999. Merchandise exports are expected to show little if any growth, but imports are expected to rise over 20%. There are concerns that Korea may not be able to sustain robust growth after 1999 unless it continues to implement effective reforms in its financial, corporate, government and labor sectors.
All percent changes cited in this report are comparisons with the same period in the previous year (year on year, or YOY) unless otherwise specified.
Consumption
Expenditures on domestic consumption, which accounted for 62% of total GDP, fell 8.2% in 1998. Faced with numerous corporate bankruptcies, rising unemployment, the decline in real household income, and consumer uncertainty, total private consumption dropped 9.6%, while government consumption fell 0.1% in 1998. The National Statistics Office reported that the income of urban workers, adjusted for inflation, fell 13.4% in 1998 and that adjusted urban household consumption expenditures fell 17.3%. Total retail and whole sale sales fell 12.7%, and sales of consumer goods, both durable and non-durable, fell even more sharply. However, total sales rose 6.1% in the first quarter of 1999, and sales of consumer goods also rose, driven by pent-up demand and rising income. The Bank of Korea recently predicted that private consumption would rise 6.4% in 1999.
Investment
Enormous capital investments made in the 1990s created over-capacity in many industries, so investment dropped sharply in 1998. Investment in fixed capital fell by 2.2% in 1997, and by 21.1% in 1998. Construction investment expenditures fell 10.2% in 1998, and domestic machine orders fell 38.5%. Industrial production fell by 7.3% in 1998. The average factory operating rate fell from 80% in 1997 to about 68.1% in 1998, but rose back to 71.3% in the first quarter of 1999. Compared with the low levels experienced in 1998, investments aimed at maintaining or improving efficiency at existing plant are expected to raise some investment indicators. Facility investment rose 10.9% in the first quarter of 1999 and domestic machine orders rose 16.9%, but construction investment expenditures fell 13.7%. The Bank of Korea recently forecasted that corporate investments would rise 22.5% in 1999, after falling 38.5% in 1998.
Exports
On a customs-cleared basis, Korea's merchandise exports grew 5% in 1997 to reach $136.2 billion, but then fell 2.8% to 132.3 billion in 1998. Although the won/$ exchange rate fell from an average of 951 in 1997 to about 1,400 in 1998, export growth was limited by competition from Asian exporters and slow or negative growth in Asian export markets. The U.S. was Korea's leading market, followed by the E.U. and Japan. Korea was the U.S.' eighth largest source of imports in 1998. Korea's exports to the U.S. were $22.8 billion (up 5.5%) in 1998. Korea's exports to Asia dropped 16% in 1998 to $57.5 billion. Asia took 50.3% of Korea's exports in 1998, but that proportion decreased to 43.5% as exports were redirected to the growing U.S. and E.U. economies in 1998. In the first four months of 1999, Korean exports fell 5.4% to $41.9 billion. Exports to the U.S. the E.U. and Japan rose 13.3%, 3.7%, and 5.1% respectively, but exports to Asia fell 1.3%.
Korea is one of the world's leading producers of both 16 megabite memory chips and 64 megabite chips, and semiconductors accounted for 12.9% of Korea's total 1998 exports, up slightly from the 1997 share of 12.7%. However, falling prices caused Korea's semiconductor exports to decline 2.4% to $17 billion in 1998. In 1998, steel exports rose 11.9% to $8 billion, and textile exports rose 6.8% to $5.4 billion. All other export products showed declines in 1998, with vehicle exports falling 6.9% to $9.9 billion.
Korea's exports in the first half of 1999 fell 1.1% to $66.3 billion, but May and June exports were above 1998 levels. Although interest rates have come down, and financing is available for operations and trade, exports are expected to show little if any growth in 1999 due to the appreciation of the won and slow growth in economies outside the U.S. and Europe.
Imports
Korea's imports dropped 35.5% in 1998 to $93.3 billion, as interest rates rose, financing became hard to find, companies cut their investments and imports of capital equipment, importers went bankrupt, and consumers reduced their spending. However, the decline in world commodity prices, especially oil, also cut Korea's import bills. Imports in the first half of 1999 rose 15.1% to $54.3 billion, and the bank of Korea estimated that imports would rise 21.7% in 1999 to about $113. The U.S. is the leading source of Korea's imports, followed by Japan and the E.U. Although U.S. exports to Korea fell 34.2% in 1998 to $24.3 billion, Korea was the U.S.' ninth largest export market in 1998. U.S. exports to Korea in the first four months of 1999 rose 41.9% to $6.7 billion.
Korean imports for calendar year 1998 and first quarter 1999 and year-on-year percent change. Imports on CIF basis, in US$ billions.
1998 Change 1/4 1999 Change Total Imports 93.2 -35.5 25.6 8.1 Crude Petroleum 11.2 -36.7 3.8 -20.1 Semiconductors & Parts 12.2 -4.9 2.1 26.1 Chemicals & Products 7.9 -30.3 1.0 4.0 Iron & Steel Products 3.3 -46.9 2.7 -0.8 Machinery & Equipment 10.5 -48.6 6.8 -1.0 Electric & Electronic 21.6 -24.5 4.5 25.2 Machinery Cereals 2.5 -18.7 0.5 -19.7InflationIn 1997, Korea's Producer Price Index (PPI) rose 3.9% and Consumer Price Index (CPI) rose only 4.5%. The won fell 50% against the dollar in 1998, but the decline in both real and nominal compensation for workers, the weakness in domestic demand, and reduced world commodity prices all worked to constrain inflation. In 1998, the PPI rose 12.2% and the CPI only 7.5%. In 1999, consumer prices are expected to rise less than 2%.
Prices & Wages (annual percent change)
Consumer Producer Mfg. Prices Prices Wages 1980-89(average) 8.4 6.9 15.3 1994 6.2 2.8 15.5 1995 4.5 4.7 9.9 1996 5.0 2.7 12.2 1997 4.5 3.8 7.0 1998 7.5 12.2 -2.5Sources: KDI; Bank of Korea; Embassy estimatesPrincipal Growth Sectors
Gross Domestic Product fell 5.8% in real terms in 1998, the worst performance since the Korean War. GDP is expected to increase 5%-6% in 1999 as the economy rebounds from last year's recession. Growth in the first four months has been uneven across sectors, with semiconductors, autos, computers, shipbuilding and telecommunications leading the improvement, and other sectors remaining in the doldrums. With exports weak and investment sluggish, Korea must rely mainly on rising domestic consumption to fuel growth.
South Korea - Year-to Year Percentage Change in Major Economic Indicators by Kind of Economic Activity, in 1995 constant Prices, (1998 and 1999 figures provisional) and sectoral share of GDP.
1997 1998 1998 Share of 1999 1/4 1/4 Annual 1998 GDP 1/4 Gross Domestic Product 5.7 -3.8 -5.8 - 4.6 (GDP) Industries 6.1 -2.7 -5.3 (92.6) 4.8 Agriculture, Forestry & 4.8 4.4 -6.3 (5.9) -7.6 Fisheries Mining 0.9 -18.3 -22.9 (0.3) -8.8 Manufacturing 5.7 -6.4 -7.2 (29.3) 10.7 - Light Industry -2.8 -12.2 -11.7 -0.2 - Heavy Industry 8.1 -5.0 -5.9 13.8 Electricity, Gas & Water 9.9 9.6 -0.5 (2.5) 3.4 Construction -0.9 -7.6 -9.0 (10.5) -15.1 Wholesale/Retail Trade, 5.3 -5.0 -7.7 (12.2) 5.8 Restaurants & Hotels Transport, Storage & 14.0 7.2 1.5 (7.9) 12.8 Communications Finance, Insurance, Real Estate & Business Services 8.1 0.8 -1.0 (19.2) 2.1 Exports of Goods, 15.2 25.7 13.3 - 12.4 Services Imports of Goods, 8.8 -27.2 -22.0 - 27.5 Services Gross National Income 5.6 -6.8 -7.9 - -1.7 (GNI)Note: Exports are on a free-on-board (FOB) basis, while imports are on a cost, insurance and freight (CIF) basis.South Korea - Year-to Year Percentage Change in Major Economic Indicators by Expenditure, in 1990 Constant Prices. (1998 and 1999 figures provisional)
1997 1998 1998 1999 1/4 1/4 Annual 1/4 Final Consumption Expenditure 4.5 -9.5 -8.2 5.0 Private 4.4 -10.5 -9.6 6.3 Government 4.6 -4.3 -0.1 -2.2 Gross Fixed Capital Formation 2.0 -23.0 -38.7 -4.3 Construction 2.5 -7.7 -10.2 -15.1 Machinery & Equipment -0.2 -40.7 -38.5 -3.9Combined output from the Agriculture/Forestry/Fishery sector shrank 6.3% in 1998, and accounted for 5.9% of GDP. Mining output declined 22.9% in 1998, and fell a further 8.8% in the first quarter of 1999. The energy (electricity, gas and water) sector shrank 0.5% in 1998 as the recession caused energy consumption to fall sharply. The energy sector grew 3.4% in the first quarter of 1999, reflecting the economic recovery.The manufacturing sector's output fell 7.2% in 1998, a huge drop from the 6.2% growth in 1997. Manufacturing accounted for 29.3% of Korea's GDP in 1997. Heavy industrial output was less affected, falling 5.9% in 1998, while output from light industry fell 11.7%, as many small and medium sized firms went bankrupt. Among heavy industries in 1998, the electrical and electronic machinery sector, which includes semi-conductors, grew the most, at 12.8%. Production in all other heavy industry sectors declined in 1998, with the industrial machine sector plunging 46.5%. Among light industries in 1998, shoes, leather, and textiles shrank the most, while food and beverage production only fell slightly.
Although still well below 1997 levels, the economy showed definite signs of rebounding in 1999. In the first quarter of 1999, heavy industrial output grew 13.8%, while the decline in light industrial output slowed to -0.2%. The electrical and electronic machinery sector grew by 29.5%, and chemicals grew 5.3%, due largely to exports of semi-conductors and petrochemicals. Production in all other heavy industrial sectors rose in the first quarter, except for machinery and non-ferrous metals.
Construction fell 9% in 1998 due to the recession and the ensuing decline in both private housing and corporate investment. In 1998, government and private construction orders fell 3.3% and 11.2%. To stimulate the economy and create jobs the government, supported by the IMF, decided to run a 5% budget deficit to finance workfare and infrastructure construction projects. In the first quarter of 1999, construction shrank 15.1%. In the first quarter of 1999, private construction fell 15.1% and public construction by 26.4%. The government may also try to attract foreign firms to invest in infrastructure projects by offering more options to own, operate or transfer projects and more tax incentives, while removing restrictions on financing and imports.
The private service sectors all grew by rates close to or higher than the GDP's 5.5% in 1997. Wholesale and retail trade, restaurant and hotel services (consumer services) grew most slowly at 5%, affected by weak consumer demand. Transportation, storage and communications services (TSC) grew most quickly at 15.2%, with telecommunications being the most active sector. In the first quarter of 1998, the sharp drop in consumer spending caused the consumer services sector to drop 5%, as Koreans cut back on shopping and eating out. TSC services grew an impressive 9% in the first quarter of 1999, based on strong performance in telecommunications.
Government Role In The Economy
The Korean government's overall macroeconomic policy has traditionally been conservative. Government spending and taxes as a share of GNP are quite low by international standards, averaging about 21%-22% over the last few years. Before the crisis, the total central government budget was virtually balanced for several years. Moreover, the quality of public expenditure is high, with an emphasis on education and public works rather than on transfer payments. In 1998, the government, with the support and encouragement of the IMF and World Bank, increased its spending 13.1% to stimulate the economy, raising its share of GDP up to 24.5%, and running a fiscal deficit of about 5% of GDP. The quicker than expected recovery should boost tax revenues and may allow the government to return to a balanced budget more quickly than the current goal of FY 2006.
At the microeconomic level, past government intervention has been extensive and costly in terms of economic efficiency. Financial capital was and continues to be expensive, due in part to large non-performing portfolios saddled on banks during the highly interventionist 1970-1989 period, to governmental controls on credit (allocated largely by firm size), and to the overall lack of competition and other rigidities in the financial system. Overseas capital transactions were tightly controlled. Investment and product safety regulations inhibited domestic competition across all sectors and often discriminated against foreigners, denying the best products to Korean consumers.
Under the terms of the agreement signed with the IMF, Korea opened up its financial and most of its corporate sectors to foreign investment, and reduced or removed controls on overseas capital transactions. President Kim Dae Jung's administration has stressed the role of markets over the government. The policies described in the investment climate section of this report describe how the government is striving to put the economy and Korean companies on a market-driven commercial footing.
The Korean government itself plays a direct role in the economy through a total of 108 non-financial public enterprises which account for 6% to 8% of GNP. The government is planning to privatize and sell off many of these enterprises, both to raise funds and to reduce the government's economic role. Although details remain to be worked out, the government has announced it will allow private and foreign investors to buy a varying proportion of shares (up to 100% in some cases) of these companies.
Balance Of Payments Situation
Korea ran current account (CA) deficit $8.6 billion in 1997, but a 35.5% drop in imports in 1998 helped generate a $40 billion surplus in 1998. The 1999 current account surplus is expected to be about $20 billion, reduced by rising imports.
The deficit on the capital account deteriorated, from a $1.3 billion surplus in 1997, to a deficit of $4 billion in 1998. Investment outflow fell 13.1 % in 1998, as Korean conglomerates sold their stakes in foreign firms in 1998 to raise cash and reduce their debt/equity levels. However, the capital account showed surpluses in four of the first five months of 1999, creating a surplus of $2 billion.
Gross foreign indebtedness amounted to $158.1 billion at the end of 1997 and $152.6 billion at the end of 1998, while net foreign debts were $52.7 billion and $19.6 billion. At the end of May 1999, gross foreign debt was down to $142.8 billion, and net foreign debt fell to only $5.1 billion. Korea's useable foreign exchange reserves exceeded $60 billion in July 1999.
The Korean won ended 1996 at 844.2 won/$, and the average rate was 806.9 won/$. The won closed at 1,695.8 on December 31, 1997, and the average exchange rate in 1997 was 951.1 won/$. The won appreciated slowly in 1998, with the average exchange rate rising to 1,399 won/$. In 1999, the won appreciated due to an oversupply of dollars generated by foreign investment and trade surpluses, and the rate is expected to hover between 1,150-1,200 won/$ in 1999.
Balance of Payments, in US$ billions (Bank of Korea, Korea Institute of Finance, Korea Development Institute
1996 1997 1998 1/4 1999 Current Balance -23.0 -8.2 40.0 6.8 - Trade in Goods -15.0 -3.2 41.2 7.1 -- Exports FOB 130.0 136.2 132.3 30.3 -- Imports FOB 144.9 144.8 93.3 25.6 - Trade in Services -6.2 -3.2 0.4 0.1 - Net Transfers & Income - 1.8 -1.8 -1.5 0.2 1996 1997 1998 1/4 1999 Capital Account 23.3 1.3 -4.0 1.5 - Direct Investment - 2.3 -1.6 0.4 0.3 - Portfolio Investment 15.2 14.3 -2.0 0.5 - Other Investment 11.1 -10.8 -2.6 0.7 Errors and Omissions 1.1 -5.1 -5.1 -1.9 Changes in Foreign Exchange Reserves* -1.4 11.9 -31.0 -6.3 Foreign Reserves 33.3 20.4 52.0 57.1(* Negative numbers denote an increase in reserves.) Infrastructure SituationKorea has excellent infrastructure in the transportation and high-tech areas. Despite the heavy traffic, Korea has an extensive road infrastructure system with several major highway arteries going North to South as well as West to East of the peninsula. Korea also has an extensive subway system in Seoul with a train and bus system in place that reaches to the far reaches of the country. In addition, Korea has domestic airports in the largest cities and the island of Cheju with the largest international airport located in Seoul, and another international airport in the planning stages in Inchon.
Korea has an excellent information and communications infrastructure. The Korean government and private sectors continue to vigorously expand and improve upon this infrastructure in order to develop a leading information- and knowledge-driven economy. This information infrastructure development effort, called "Cyber Korea 21," includes significant monetary commitments by the Korean government, and the results should benefit U.S. firms that choose to do business in Korea.
With the end of the 20th century approaching, the Korean government and industry have focussed increasing attention on the year 2000 (Y2K) problem, which will affect both computer systems and non-computer systems that are reliant upon embedded microprocessors. Academia, the Korean and U.S. governments, and the private-sector have held a number of Y2K conferences, and newspapers regularly report on the problem and progress made. The Ministry of Information and Communications, which leads the interagency Korean Y2K Taskforce, launched a highly-publicized national campaign in late May designed to increase public awareness of the problem and government assistance available. Government services include low-interest loans as well as free consulting services to help small and medium enterprises assess and remediate Y2K-related problems. Of the mission-critical sectors identified by the Korean government, those furthest along in establishing Y2K readiness include banking and finance, electricity and energy, and industrial facilities.
Telecommunications and transportation are reasonably prepared. Sectors that are of considerable concern include environmental, shipping and ports, water resources, and medical services. As is the case in many countries, small and medium enterprises are furthest behind in Y2K readiness.
|
[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
Next Chapter | Table of Contents
|
