Will the Korean economy return to growth in 1999, rebounding from its six percent contraction in 1998? The answer, according to government-run research institutes and foreign agencies is overwhelmingly in the affirmative. However, private economic research institutes predict a high possibility of a further downturn next year due to adverse external economic factors. Most Korean government-run research institutes including KDI (Korea Development Institute) and KIET (Korea Institute for Industrial Economics and Technology) are optimistic about the prospects for economic growth, while private research institutes such as the Korea Economic Research Institute and those run by Samsung, Hyundai, Daewoo, by contrast forecast growth of just one percent next year. Meanwhile economic consultants WEFA, the OECD (Organization of Economic Cooperation and Development), and the International Bank for Reconstruction and De- velopment (better known as the World Bank) predict growth in the Korean economy of 0.6 percent, 0.5 percent, and one percent respectively. Why then, are such different forecasts arrived at, and how are economic factors evaluated? Economic growth is dictated largely by consumption which includes government expenditure, investment, and any balance of payments (BOP) surplus. As consumption rises, and investment becomes active, economic growth also increases. A climb in the balance of payments also contributes to an increased economic growth rate. Now, let's look at the major economic indicators of 1999 in detail.
Consumption Consumption has the greatest impact on the economic growth, accounting for about 65 percent of the overall national economy. If consumption in 1999 increases more than that of 1998, economic growth will naturally increase. Interestingly, those research institutes that forecast economic growth also predict that consumption levels will rebound. On the other hand, institutes run by Daewoo and Samsung, plus the Korea Economic Research Institute project falls in consumption. Their analysis is based on the fact that the unemployment rate will continue to rise, and that restructuring efforts, which will result in further unemployment, have not yet been completed. Almost all research institutes agree that the unemployment rate will increase. Consumption depends on disposable income. Consumption will never go up while unemployment rises and the economy shows no signs of recovery. However, the current bullish stock market fuels expectations of economic recovery and the possibility of rising consumption next year. Investment The major reason for the six percent decline in economic growth in 1998 was a drastic drop in investment. In particular, investment in manufacturing facilities decreased noticeably compared to that in construction, falling by 45 percent compared to 1997. Samsung Institute and Daewoo Institute have forecast a sharp fall in investment in manufacturing facilities in 1999, and other institutes seem to share their view. Investment is affected by interest rates. If interest rates in 1999 remain at a low level as expected, then why won't investment increase? The reason is uncertainty. Companies lack confidence, and do not expect to make profits should they launch new products in the current market. On top of this, the export market is also uncertain. It is unreasonable to expect companies to expand their investments in the face of an uncertain future. Investment in construction is also unlikely. No other institute except the Hyundai Economic Institute predicts investments in construction will increase. Imports & Exports Foreign trade can also serve to fuel economic growth. One of the reasons why the economy in 1998 did not contract more than six percent was due to a surplus in the balance of payments resulting from a marked drop in imports. If the economy improves in 1999, the stimulus might well come from trade. However, the prevailing view is that the value of exports will be down compared to 1998. In addition, the BOP surplus is also expected to contact, a prediction based on an increase in imports over 1998. However, the Daewoo Economic Institute predicts a continuous decrease in imports in 1999. Shrinkage in domestic demand and a delay in the normalization of financial systems may result in a fall in exports as well as in imports. Other economic institutes uniformly argue that imports will increase. Consumer Price Index The Consumer Price Index (CPI) in 1999 is projected to stabilize at two percent. Experts are even worried about deflation. The rationale for a stabilized consumer price index is a limited fluctuation in foreign exchange rates, and price stability in raw materials in the international market. Besides, wages are expected to stay constant, and pressures on consumer prices will also be low. Economic Forecasts for 1999
Prospects for a Recovery in the Manufacturing Sector The manufacturing sector experienced a continuous slowdown in 1998 due to plummeting domestic demand, shrinkage in facility investments, high interest rates, and a financial crunch in many companies. As a result, the average operational rate in the manufacturing sector fell to 63 percent, the lowest in its history. However, the manufacturing sector is expected to see a slight recovery in 1999. Economic stimulus measures introduced during the second half of 1998 triggered a recovery to some extent, which will serve invigorate industrial production in 1998. On top of this, exports are expected to show growth compared to 1998, despite the recession in the world economy. The home electronic appliance industry is expected to record a 9.9 percent increase over the previous year, amounting to a production value of 11.46 trillion won. However, output will undergo a 4.8 to 10.9 percent fall due to a slowdown in domestic demand as a result of saturated demand, as well as slackening in orders from exports markets such as Southeast Asia, Russia, and Latin America which are in the throes of economic crisis. The semiconductor industry is expected to see a slight recovery and emerge from its present recession. This optimism is mainly derived from expectations of replacements of personal computers, the largest source of demand for memory chips, and expanded distribution of software for Windows 98. In addition, exports of semiconductors are projected to record a 3.8 to 10 percent rise, a slightly higher increase than the previous year, but the industry still may not show the dramatic growth it did before due to a slowdown in the U.S. market, and an overall economic recession in Asia. The auto industry suffered a severe slump in 1998, and all four domestic auto manufacturers are predicting red ink on their ledgers. However, domestic demand is expected to revive in 1999 by as much as 27 percent over 1998, in sharp contrast to that year's 50 percent falloff. In particular, price competitiveness will be sharpened as a result of labor cost decreases. In addition, if the yen continues to gain in strength well into 1999, the industry is expected to experience a seven to 11 percent growth despite a shrinkage in the markets of some developing countries, the major destination of its exports. The shipbuilding industry is expected to experience stable growth in 1999 since firstly, it has secured sufficient orders since 1997 to ensure a satisfactory operational rate, and secondly, the stronger yen and a depreciation of the Korean won will continue to lure orders from foreign shipping lines. Furthermore, a steady increase in replacements orders, coupled with a speculative buying by foreign ship owners attracted by low prices resulting from the depreciated won, may well fuel further demand.
Mixed Outlook for Steel, Petrochemicals, Textiles, Construction The steel industry experienced a 30 percent reduction in domestic demand in 1998, while exports grew by 40 percent as a result of aggressive marketing to overcome stagnant market conditions at home. Facility investment in the industry is projected to show some signs of recovery in 1999, but not to any great extent. Following their 40 percent growth in 1998, exports will fall by two to five percent in 1999 due to tougher import controls by the advanced economies. It is estimated the petrochemical industry will have recorded a slight increase in production of six percent by the end of 1998 due a series of large-scale facility investments. Exports also rose approximately 33 percent as producers sought to utilize surplus capacity caused by a fall in domestic demand of about 15 percent. However, in 1999, exports are projected to drop by 7.3 to 0.4 percent due to a sharp fall in exports to Asian markets. The textile industry experienced widespread difficulties due to a low demand in the domestic garment market, and slackened exports of yarns and fabrics to the China. However, the situation is likely to improve in 1999 due to a slightly revived domestic economy and an increase in exports to the Chinese market. Still, the level of recovery will not be large, and the profitability in the polyester and cotton industry will be undermined by price increases in raw materials occasioned by an increase in overseas demand and a poor cotton harvest in China. The construction industry slumped badly in 1998. It may undergo a slight recovery in 1999, but its prospects are far from clear. The government has boosted its 1999 SOC (social overhead capital) budget by five percent over 1998 to 12.705 trillion won, but observers contend that so a slight an increase will be insufficient to re-invigorate the industry because of an anticipated slowdown in the private sector. In 1999, several new developments are predicted for domestic industry. The Samsung Economic Institute forecasts a wide gap in profitability between domestic companies and their foreign-invested counterparts, and huge disparities between different industries and companies within the same industry. Foreign-invested companies will see handsome returns, while the profit-base of domestic companies will be eroded by heightened competition. In particular, foreign-invested companies are expected to perform outstandingly in the service sector where domestic companies lack competitiveness. In addition, a big disparity is expected between companies which successfully complete their restructuring programs and those that do not. The front runners in the profitability stakes in 1999 with be those companies which have established sound fundamentals in 1998. Overall, the Ministry of Commerce, Industry & Energy (MOCIE) predicts that a recovery of Korea's credibility among foreign investors, stabilized interest rates, completion of restructuring efforts, and the government's economic stimulus package will play a critical role in reviving the economy in 1999. In addition, the ministry's Industrial Policy Division predicted that "chances are the real economy will enter a recovery stage by the middle of 1999, after having hit bottom in late 1998 or in the first half of 1999." Semiconductors
An official of the Korea Semiconductor Industry Asso-ciation pointed out that the "D-RAM market is shifting completely to the 64 megabyte model, and that the PC 100 product, the high-speed D-RAM, is already in short supply." He added that the lack of manufacturing facilities at the 0.25 micron level, which manufacture the high-speed D-RAM, will soon resolve the issue of excess supply. World Semiconductor Trade Statistics Inc. (WSTS) predicts a 6.6 percent growth in the world semiconductor market in 1999, and a gradual recovery from the second half of the year. It also added that most WSTS member companies will record sales increases of 15 percent on average next year. The U.S. industry research firm Dataquest projects that the D-RAM market in 1999 will record $18.6 billion in sales, a 30 percent increase over the previous year. Furthermore the firm believes the problem of excess supply will be resolved by a progressive industry shake-out, noting the number of D-RAM manufacturing lines which increased every year up to 1995, proceeded then to shrink from 60, to 40, 17, and finally to eight in 1998. The supply of D-RAM chips is expected to fall off as the growth in demand begins to plateau, falling from 83 percent in 1998 this year, to 55 percent in 1999, and 37 percent in 2000, as recession continues to hit the Japanese market and Korean manufacturers respond by slowing down production. Accordingly, the excess of supply against demand, which stood at 11 percent and six percent, respectively in 1996 and 1997, is projected to have dropped to 7.5 percent in 1998 and will drop to 1.7 percent in 1999. By 2000, the situation is expected to be reversed with demand exceeding supply by 6.7 percent. Auto Industry
Despite this increase, the industry's operational rate will not exceed 56.5 percent, given a production capacity of 4.25 million units. The operational rate sank to 50 percent in 1998 down from 81.5 percent in 1996 and 68 percent in 1997. Under these circumstances, even if the domestic auto market exceeded all predictions and demand reaches 900,000 units, the industry will be unable to emerge from its recession. With the exception of 1998 when sales reached only 750,000 units, during every year of the 1990s the auto industry recorded sales of at least 1 to 1.5 million units. Some research institutes including the Kia Research Institute predict a more conservative figure of 840,000 units in auto sales for 1999. One of the biggest concerns among Korean auto makers is the entry of Japanese cars into the domestic market. The move is expected during the second half of 1999, following the deregulation of the Diversification of Import Sources law, a long-standing piece of legislation designed to keep out certain Japanese imports to maintain the balance of payments between the two countries. Japanese auto imports are expected to erode the market position of domestic manufacturers. Japanese manufacturers have an edge over other foreign auto makers in terms of distance and transportational competence. Moreover, Japanese cars are equipped with features which appeal to Korean tastes. American auto manufacturers on the other hand, are far from Korean consumers, and their competitiveness tends to lie in large-sized end of the market. However, hopes for in the industry in 1999 are pinned onto a overall revival in the economy. An industry executive argued that the "consumption which has been suppressed over the past year may be released, should the economy be deemed to have touched and passed bottom." He added that replacement purchases of an estimated 700,000 units have been put on hold due to the decrease in purchasing power in 1998. In the event of a recovery, analysts believe purchases will be centered on large-sized cars. Exports in 1999 will increase slightly compared to the previous year, brightening the prospects for new models. Hyundai, Daewoo, and Kia are each preparing to launch new models in export markets. Daewoo Motors in particular is expected to wage an aggressive campaign in the U.S. market with its 1999 line-up. Shipbuilding Domestic shipbuilders are posting record high volumes of orders after winning contracts continuously through 1997 and 1998, a trend which is expected to continue next year. The positive outlook for future orders is based on the competitive price edge of domestic shipbuilders, the attractive level of prices now being tendered by Korean yards, and the current volume of break-ups. Indicators are Korea will be able to maintain its position as the world's premier exporter of vessels and also challenge Japan for the position of the world's number one shipbuilder. However, the outlook for the industry is not entirely positive. Marine transportation, a critical supply source of demand for the shipbuilding industry, remains stagnant. In addition, since the current attractive level of pricing for VLCCs and large scale containers are causing a rush of customers, supply may well have met demand by 2000 resulting in a fall off of orders. Shipbuilding orders in 1999 will be led by those for tankers or VLCCs, but the actual volume of orders is expected to fall. In the case of VLCCs, about 150 units with an operational life expectancy of 25 years are currently being operated worldwide, and it is expected about 15 to 20 units will be ordered for replacement purposes. In particular, significant demand is expected to be generated as a result of fleet reorganization following a spate of mergers and acquisitions among large shipping companies. In addition, there is industry optimism about the prospects for orders resulting from the replacement of older industrial vessels, such as LPG and petroleum product carriers, as well as from new demand. Steel Industry The overall economy is now in recession, but with signs of recovery in 1999, greater demand is expected for steel. The Pohang Iron and Steel Co Research Institute (POSRI) projects the demand for steel will hit 26.36 million tons in 1999, a 8.9 percent increase over 1998. The projection is based on an analysis that investment rather than consumption will drive economic growth next year. On top of this, it is expected that private sector construction will benefit from an upturn in housing demand prompted by the government's economic stimulation policies. However, demand is forecast to reach only 69.1 percent of the 38.15 million tons produced in 1997. Predictions are the world steel market in 1999 will undergo a slight recovery. However, exports will fall to 14.26 million tons, a 5.3 percent reduction over the previous year, due to trade conflicts and foreign exchange rate shifts. Projections for world steel demand by different economic institutes vary widely, and POSRI projects a meager growth of just 0.2 percent. In general, the prevailing opinion is that the steel industry in 1999 will show signs of recovery, but any growth is likely to be slow. Information & Communications A sea change is expected in the information and communications industry in 1999. Firstly, in local and long-distance markets, the demand for wireless service will outstrip that for wired service. In addition, the number of social infrastructure communication projects and data communication networks will increase because of explosive demand from the Internet and PC on-line services. During the latter part of 1998 demand for local, long-distance, and international calls fell, and the revenue from wired telephone services dropped for the first time in the 100 years in the operation of the telephone business in Korea. By contrast, the wireless communication market is burgeoning. The domestic mobile telephone services now count more than 14 million subscribers despite a shrinkage in consumption following the austerities of the International Monetary Fund's (IMF) restructuring program. The revenue from early 1998 to July of the same year amounted to 2.2137 trillion won, a 28 percent increase over the previous year. The pager market, however, which previously experienced an average annual growth rate of 79 percent, is now undergoing a serious contraction in the face of strong competition from mobile phones. Total pager service revenues to July 1998 amounted to 769.1 billion won, a five percent drop from the previous year. Revenues are expected to fall a further 10.4 percent by the year's end as subscriptions are cancelled in favor of the services provided by mobile phone operators. Paging services claimed 15.2 million subscribers in 1997, but subscriptions fell to 13 million in 1998, and are expected to decline again to 6.4 million by 2002. Electronic Commerce The domestic Internet market showed a slight dip after the economic crisis, but is still expected to grow steadily in 1999. The number of domestic Internet users continues to rise by 50 percent annually on average. A study by the Korea Electronics Communications Research Institute projected that the number of the Internet users in Korea will reach six million in 1999 up from 4.5 million in 1997, and 2.5 million in 1995.
In addition, the number of domains, i.e. Internet addresses, has also grown rapidly every year, averaging annual increases of 68 percent. It is estimated the number of domains will reach 48,000 in 1999, double the 24,000 of 1998. Electronic commerce is also undergoing aggressive growth worldwide, and has emerged as one of the booming businesses of the late 1990s. However, there is a wide disparity in the estimations of the size of this market since the business is still in its incipient stage. According to the Korea Information & Communication Promotion Association, the domestic electronic commerce market will record sales through the Internet of 61.4 billion won in 2000, a spectacular increase on the estimated 15 billion won in sales in 1999, the 10 billion won in 1998, and the 6.3 billion won in 1997. In the meantime, the American consulting firm IDC predicted the size of the electronic commerce market in the U.S. will rise to $2 billion (equivalent to 2.7 trillion won) in 2002, emerging as the second-largest such market in the Asia-Pacific region after Japan. The domestic market for electronic commerce, mainly represented by the Internet Shopping Mall, currently is less than 10 billion won in size. However, the growth of home-based businesses, or SOHOs (Small Offices/Home Offices), suggests there will be an increasing interest in marketing products through the Internet. Analysts predict, though, that the market will still be in its nascent stage by the end of 1999. Home Electronics Industry The Space Shuttle journey in late October 1998 by 77-year-old former U.S. Senator and first American to orbit the earth, John Glenn, was broadcast on digital TV. This new medium is now recognized as another revolutionary market. For this reason, domestic companies, including Samsung and LG, as well as overseas electronics firms such as Matsushita and Phillips are competing for a share of this market which is now the darling of the digital age. LG Electronics, which acquired the American electronics company Zenith, is staking its future success on the digital TV market. LG has introduced different models targeting the U.S. and U.K. markets. The 64-inch Super Large Digital Projection TV by LG, available in the U.S. from early 1999, will be the largest of all digital TVs currently on the market. Along with this, LG is also working on the development of a new product, a far superior digital TV product to be launched in the first half of 1999. Samsung Electronics has already introduced a 55-inch digital TV with a set-up box which can receive digital TV broadcasts. Samsung has contracted to supply 200 units, with a price tag of $8,000 each, an unusually high price for home electronics item. Daewoo is also ready to make inroads into the U.S. market with the introduction of a 32-inch digital TV, and is determined to go into full-scale production from the first half of 1999. These moves by home electronics manufacturers are based on rosy predictions for a broad expansion in the digital TV market. Affected by the current environment, domestic home electronics manufacturers are launching new products such as digital TV and HDTV (High Definition TV) to stay competitive in the world market. The Korea Electronics Promotion Association released a report stating that a total of 86.35 million digital TVs would be sold worldwide in 2003, and sales would amount to 450 million units by 2010. Petrochemical Industry The petrochemical industry is expected to undergo a slight recovery in 1999 compared to the previous year, but its immediate future is clouded. In the second half of 1999, a balance of between supply and demand will be realized as key export markets in Southeast Asian market stabilize and uncertainty eases in major client industries such as electrical appliances, electronics and auto components. Despite an overall drop in demand, petrochemical production will reach 13.536 million tons in 1999, a 2.1 percent increase over 1998. The domestic market in 1998 is expected to have fallen to 7.6 million tons, a drop of 14.5 percent compared to 1997's consumption. This represents a decline in the rate of contraction as compared to 1998, but the market is still expected to shrink by 3.1 percent in 1999 even if client industries such as electrical appliances, electronics, autos, and construction recover during the second half of the year. Despite anticipated expanded demand in China, petrochem exports, unlike those of other products, may not enjoy a windfall because of the stronger yen since Southeast Asian markets will remain depressed for some time and major Korean export items are targeted at different markets to their Japanese counterparts. However, exports to other markets will rise gradually as the economies of Southeast Asia stabilize, and market diversification efforts by domestic companies begin to yield fruitful results. In 1998, the industry exported product amounting to 13.2548 million tons, a 35.2 percent increase over the previous year as a direct result of aggressive marketing, but in 1999, exports will grow by a meager 6.2 percent to total 13.536 million tons. by Samuel Bae
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The world semiconductor market is projected to
expand by 20 to 30 percent this year, improving the
financial status of domestic manufacturers to a large
extent and stimulating a gradual industry recovery.
However, total performance is not considered likely
to outstrip that of 1995, a banner year for the
semiconductor industry. The ministry is projecting
increases of 11, 7.5, and 10 percent in production,
domestic demand and exports, respectively, for the
domestic semiconductor industry as conditions of
over-supply in the world market begin to ameliorate
and prices improve.
Auto sales are expected to reach 2.45 million units
in 1999, a 14.3 percent increase over 1998's total.
However, the operational rate will remain depressed
and difficulties will persist. The Korea AutoIndustry
Association predicts domestic sales in 1999 will
increase by 150,000 units to 900,000 units up from
the 750,000 units expected to be sold by the end of
1998. In addition, exports are expected to climb by
11.1 percent to 1.5 million units in 1999 from the
1.35 million units in 1998. The total volume of sales
is thus projected to rise to 2.4 million units in 1999,
up from the anticipated 2.1 million units in 1998.
However, when the number of people using
the Internet through PC on-line services
is included, the total number of the
Internet users may already exceed six
million. On top of this, the number of host
computers, an indicator of the quantitative
growth of the Internet, reached 189,000
units in 1998, a 44 percent increase over
the previous year. Their numbers are
expected to grow by 30 percent to
250,000 units this year. 
