Economy

Korea's Usable Forex Reserves Surpass $40 Billion for First Time

Korea's usable foreign exchange reserves have surpassed the $40 billion level for the first time, the Bank of Korea (BOK) announced Aug. 18. The nation's foreign exchange holdings amounted to $43.9 billion as of Aug. 15 on an outstanding basis, representing a 2.15-fold increase on the $20.4 billion recorded at the end of 1997. Meanwhile, its usable foreign exchange reserves exclusive of foreign currency deposits held at domestic banks' overseas branches stood at $40.1 billion as of Aug. 15, a 4.5-fold increase over the $8.8 billion recorded at the end of last year. This is the first time Korean usable foreign exchange reserves have exceeded the $40 billion mark since the relevant statistics were first collected in 1996, a BOK spokesman said.

OECD Forecasts 2.5-Percent Growth for Korean Economy Next Year

Korea's economy is expected to grow by 2.5 percent next year and by up to seven percent by 2003 if the nation sticks to its ongoing reforms, the OECD said in its economic survey on Korea. According to the report available from the Ministry of Finance and Economy, experts from the organization's member countries forecast a contraction in the Korean economy this year of five percent because of restructuring. It followed a forecast by the government and the International Monetary Fund that the economy would shrink four percent in 1998. Unlike the government-IMF projection that the jobless rate would fall below seven percent by the end of the year, the Organization for Economic Cooperation and Development forecast the unemployment rate would hit eight percent during the remainder of 1998. However, the report predicted the jobless rate will come down to four percent by 2003, despite a sharp increase in the economically-active population as more jobless people are likely to come on to the labor market, the report said.

W estern firms 'merger and acquisition (M&A) activity in regard to Korean and Japanese firms sharply increased this year, in contrast with the overall decline in M&A attempts in other Asian nations. Quoting a source at international financial consultants KPMG Corporate Finance, KOTRA's Brussels Bureau reported that M&A investments had sharply declined in Asia, particularly in China, India, Hong Kong, Indonesia and the Philippines, due to the ongoing currency crisis. However, foreign investors' M&A ventures had surged to $3.36 billion in Korea for the first half of this year, from just $260 million a year earlier, it said. The increase in Japan was even more dramatic, jumping from $113 million to $5.33 billion during the same period. KPMG attributed the surge to both countries opening up their domestic markets, allowing easier access for foreign corporate bargain hunters. KPMG noted that Korea and Japan were the only exceptions in the Asian region, which saw M&A investments slashed by about 50 percent during the first half of this year as compared to 1997.

Office Buildings Major Focus of Foreigners' Interest

A rapidly-emerging favorite of foreign real estate investors in the Korean properties market are office buildings, a survey indicated. According to a survey conducted by the Ministry of Construction and Transportation during the recent international real estate fair in Seoul, 40 percent of the pollees reported they are interested in purchasing office buildings. About 1,000 of the foreigners who participated in the real estate fair responded to the survey. The type of property drawing the next keenest attention from foreign investors was hotels. About 27 percent replied that they intended to invest in hotels. It was followed by land with 20 percent, apartments (10 percent) and shopping malls (three percent). In terms of intended investment amount, the largest grouping, some 33 percent of investors, said that they would invest between $10 million and $100 million. The second-largest, 28 percent, responded that they would invest between $5 million and $10 million. About 17 percent indicated between $1 million to $5 million as a likely investment figure, and the remaining 11 percent, $100 million or more.

Government to Offer 25 Percent Share of KTG for Sale in August

The government will put its 25-percent holding in Korea Tobacco and Ginseng Corp. (KTG) up for sale in October, officials said. Among the corporations showing interest in acquiring a stake in the state tobacco firm include Philip Morris Inc. of the United States and the Lotte Group of Korea, according to industry sources. Under the government's sweeping privatization program of state enterprises, Korea Tobacco and Ginseng, a state monopoly supplier of cigarette and ginseng products, will be fully privatized by 2000. The government holds 69.8 percent of the corporation's stock. Of this total, the government will allocate 32.3 percent for the recapitalization of the Industrial Bank of Korea, and 2.1 percent for sale to the state-run company's employees. The remaining 35.3 percent will be offered for sale to domestic and foreign investors. Twenty-five percent was scheduled to be put on sale in August. KT&G has 7,573 employees and recorded 225 billion won in net profit from 4.2 trillion won in revenue in 1997.

EU Investment Mission to Visit Seoul in October

The European Union (EU) plans to send a large-scale investment mission composed of delegates from all its constituent 15 member countries to Seoul, possibly in October this year. If realized, it will be the first time that so large an investment mission from Europe will have visited Korea. Until now, individual countries such as Britain or France have dispatched or plan to send delegations to sound out the investment environment here.
 The EU mission is scheduled to visit Seoul around Oct. 13, but detailed a timetable will be decided through consultations with the member countries. The delegation plans to meet both government and business leaders as well as President Kim Dae-jung during their visit.

Government to Sell 10-Percent Stake in Korea Telecom to Major Foreign Carrier; Foreign Participation in Voice Resale

In a move to restructure and merge the country's telecommunications companies, the Ministry of Information and Communication is allowing foreign investors to take larger stakes in industry players and reforming burdensome regulations. By taking this route, the government is allowing market forces to bring about corporate reforms instead of using the force of the law. Ministry officials are now promoting a strategic alliance between Korea Telecom and a major foreign telecom operator. Ministry officials said they are in touch with global carriers such as AT&T, British Telecom, Deutsche Telecom and France Telecom. The ministry intends to sell off a government-held 10 percent equity stake in Korea Telecom (KT) to one of these foreign operators. To promote this plan, the ministry will first allow an individual foreign investor to own up to 10 percent of KT, up from the present limit of three percent.
 The ministry also plans to expand the maximum stake granted to foreign investors in KT as a group from the present 20 percent to 33 percent within this year. For other domestic telecom operators classified as basic carriers, foreign investors have been allowed to own up to 33 percent - individually or collectively - from earlier this year.
 The ministry intends to raise this ceiling to 49 percent next year. However, in new segments such as voice resale and Internet telephony, foreign investors will not allowed to take any stake in local operators until the end of this year. The ministry is planning to lift this restriction as well, allowing foreign operators to own up to 49 percent of the local providers of these new services within this year. This measure will allow foreign operators to participate in the lucrative voice resale and Internet telephony segments, where competition is already fierce among local companies.

Foreign Investment Surges in July

J uly's foreign investment surged by 203.4 percent to $1 billion over last year, thanks to the accelerated efforts of financial institutions and companies to draw foreign capital, finance ministry officials said. Compared with the $663 million recorded in June, the figure was up 86.3 percent, they said. "Foreign investment is steadily rising since bottoming out in January. The restructuring efforts in the financial and industrial sectors are showing visible results, boosted by the stabilization of the local currency market and foreign investment liberalization measures," said an official of the Ministry of Finance and Economy. Foreign investment in January was $130 million, down 85.1 percent from the same month of last year. July marked the third time that monthly foreign investment exceeded $1 billion since April last year ($1 billion) and Dec. last year ($1 billion). Purchases of extant stock for purposes of mergers and acquisitions (M&As) accounted for the increase in foreign investment during the seven-month period.

 The number of foreign M&A investments reported to the ministry in the seven-month period totalled 128. Their value was $862 million, or 23.3 percent of total foreign investments for the period. This represents a huge increase on last year's 10 percent. In 1997, foreign investments amounted to $6 billion, $699 million of which was represented by mergers and acquisitions. For the first seven months of this year, there were 325 cases of foreign investment in manufacturing. Their value was $2 billion, or 59.7 percent of total foreign investment, for the cited period, a big jump from last year's proportion of 33.7 percent. Among July's major foreign investments were a $276-million recapitalization deal between the Korea Exchange Bank and Commerz Bank of Germany, a $250 million joint venture between Oriental Brewery Co. and Interbrew of the Netherlands, a $181 million buy-out by Wal-Mart of the United States of Korea Makro, and a $71 million sale of cutting tool business Daehan Jungsok Co. to Iscar of the Netherlands.

Foreign Firms Push for M&As in Korea

Foreign companies operating in Korea are aggressively pushing for mergers and acquisitions among their subsidiaries in what is seen as an overall corporate restructuring drive. According to business sources, foreign businesses in joint-ventures with Korean partners are looking to merge their Korean subsidiaries to sharpen their competitive edge. Bosch, the world's largest maker of automotive equipment, plans to merge its six affiliates operating in Korea soon after the international bidding for the takeover of the bankrupted Kia Motors is completed. The German company has recently bought a 50 percent equity stake in Korea Automobile Motor Corp. (KAMCO) from its Korean joint-venture counterpart, Mando Machinery Corp. It has also bought out the interest of erstwhile partner the Doowon Business Group in their former JV, Korea Bosch Mechanics and Electronics Co. (KBME). Also, German chemical giant BASF plans to merge its three affiliates - BASF Korea, BASF Styrenics Korea and BASF Urethane Korea - into one early next year.

Small IT Firms Out to Attract Foreign Investment

Foreign investment has been notably sluggish in Korea's small information technology industry, despite its high level of technical competence and tremendous potential for growth. Since early this year, many promising small IT firms have sought to attract foreign capital to cope with the current economic difficulties. Only a few have been successful. Industry watchers attribute the disappointing level of foreign investment capital to sharp differences between foreign investors and local IT businesses concerning the value of the firms in question.

 By contrast, one multinational which has found value in the local corporate IT market is Motorola. After announcing a $300-million investment plan for Korea in May, the American communications and chip giant put $15 million and $10 million in Pantech and Telson Electronics, respectively. The two companies are both considered as top players among Korea's IT venture firms. Emboldened by their success in the pager production business, they moved to a more sophisticated sector: the production of CDMA (code division multiple access) mobile phones. "Motorola's investment in the two firms totals $25 million, which means it still has $275 million left to invest. It wants to invest more but without paying too much," commented an industry insider.

In order to help ease economic restructuring pains such as high unemployment and the liquidity crunch, the government plans to implement a short-term economic stimulus package in the latter half of this year. Under the new measures, it is considering expanding its 1998 budget deficit from 7.8 trillion won, or 1.7 percent of its GDP, to 13 trillion won, or three percent of GDP. Officials at the Ministry of Finance and Economy expect the national economy, which contracted 3.8 percent in the first quarter of this year, to shrink by four or five percent by year's end. GDP measures a country's total output of goods and services, less foreign income.

Import Regulations to Be Eased

The government plans by next year to abolish or ease import restrictions in 56 different areas, a move in line with the agreement it made late last year with the International Monetary Fund (IMF), officials said. Officials at the Ministry of Commerce, Industry and Energy said they will abolish the current system requiring importers to submit letters of prior notification to import gas products. It will also do away with import certifications for buyers of medical products. The ministry said it will also abolish quarantine procedures for cosmetics and fur- and hair-processing goods, among others. These and other measures, which the government had agreed with the IMF when it accepted assistance from the fund last December, will be submitted to the IMF's resident office in Seoul. Importers of foreign movies or fertilizers will be required only to report the importation of their respective products rather than obtain government approval.

Government to Designate 4 Industrial Parks, Free Trade Zones for Foreign Investors

In a bid to facilitate foreign direct investment, the government plans to designate at least four free trade zones and industrial complexes exclusively for foreign investors within this year. According to the officials at related government agencies, the government is currently considering designating three locations as free trade zones for foreign investors. Some of the hopeful candidates include Songdo Media Valley in Inchon, now under construction, Noksan Industrial Complex and Chinsa Industrial Complex in Sachon, South Kyongsang Province, the officials said.

The government is also planning to designate a new industrial park slated for Ulsan, South Kyongsang Province, for foreign use only. These sites have been selected by the central government among dozens of candidates recommended by provincial governments in the hope of obtaining various tax and financial incentives, said the officials at the Ministry of Commerce, Industry and Energy. So far, only two, one in Chonan and the other in Kwangju have been designated as industrial complexes for foreigners.

Government to Allow Private SOC Ownership for 99 Years

The government will allow the private investors in infrastructure projects, including foreigners, to own the facilities they build for up to 99 years, in a move to spur private investment in large public projects. It also will guarantee investors a maximum 90 percent of projected operating income, and make put options available to foreign investors so as to enable them to sell their equities after certain period of time. These are some of measures the government has finalized to induce private funding in social overhead cost (SOC) projects. They were devised by the government reform agency, the Korea Research Institute for Human Settlements (KRIHS), at the request of the Planning and Budget Commission. The state-run think tank has been working on the overhaul of infrastructure project systems. Under the measures, the government will abolish the requirement for private investors to raise all the capital of an infrastructure project before starting construction. "The measures are intended to promote investment in SOC projects, particularly by foreigners," said Lee Kyu-bang, a senior research fellow at the KRIHS.

Exports of mini cars with an engine capacity of less than 1,000 cc have been expanding lately, according to the Customs Administration. The Customs Administration report showed that mini car exports recorded 110,000 units in the first half of 1998, or $424 million, up 115 percent in volume and 109 percent in value, from the same period last year. On the other hand, exports of cars equipped with engines ranging from 1,000 cc to 1,500 cc rose to 307,000, or $1,424 million in the first half, up eight percent in volume, but down 30 percent in value from the same period last year. Exports of mid- and large-sized passenger cars, which make up the core of vehicle exports, recorded only 245,000 units in the first half, up four percent in volume, but down 11 percent in value at $1.88 billion.

Pak's Win Promotes Sports Marketing

Golf sensation Pak Se-ri's dramatic victory in the U.S. Women's Open will spur business firms to capitalize on sports marketing to enhance their corporate images, a research institute said. Samsung, Park's corporate sponsor, is beefing up its promotion team to use her image and name in the company's publicity activities, and other firms are set to follow suit, the institute said in a report. "Her triumph earned Samsung as much as $540 million in terms of corporate publicity," said the Samsung Economic Research Institute (SERI), an affiliate of the giant Samsung Group. While the 20-year-old rookie's capture of the McDonald's LPGA Championship in May helped Samsung earn broader global recognition, the latest triumph will place its products among consumers' popular choices, the report said. It also indicated that the young golfer's capture of the two majors will open the way for local businesses to strengthen their marketing strategies through sports.

Wal-Mart's Rock-Bottom Sale Sparks Price War Among Discount Retailers

The "all-out bargain sale" launched by Wal-Mart Stores Inc. in August led a bevy of other discount retailers to follow suit, opening the possibility of a full-blown price war in the local discount retail sector. Shinsegae Department Store's E-Mart countered Wal-Mart's incredibly low prices almost immediately. Launching a sale of its own, the store is matching or outdoing the U.S. retailing giant's bargains on similar or the same products. Market observers had speculated that Wal-Mart's bargain sale was prompted by a need to unload a considerable amount of stock and predicted that the price cut will not last long. Still, E-Mart has been wary of Wal-Mart's every move since the U.S. retailer jumped into the local market by buying out Korea Makro Co. and its four outlets in Korea July 12. Wal-Mart's first sale offered some products at 10 to 30 percent less than other discount retailers, and tension is mounting in the industry over the slashed prices. Other retailers quickly followed suit. Kim's Club, run by the bankrupt New Core Department Store, slashed its prices for 500-gram bags of Maxwell House Fine Coffee to match E-Mart's 8,680 won.

Business

Foreign Firms Account for 6.1 Percent of Total Turnover

The turnover of foreign companies in Korea accounted for 6.1 percent of the nation's total turnover in the manufacturing industry in 1997, up from 5.5 percent in 1996, the Bank of Korea (BOK) said. Reflective of their overall profitability, the ratio of ordinary income to sales for foreign companies in Korea was 1.7 percent in 1997, against the negative 0.5 percent for Korean enterprises. The central bank said foreign firms achieved superior profitability because of low financial costs, up-to-date technology and advanced management skills.