Economy

1999 Growth Forecast Hiked to 2.2 Pct

The Korea Development Institute revised its 1999 growth forecast for the Korean economy upward to 2.2 percent on Dec. 15th 1998, while warning that the country's financial crisis has yet to end. In a quarterly report on the economic outlook, the state-funded think tank forecast Korea's gross domestic product will grow by 2.2 percent in 1999 - 0.8 percent in the first half and 3.3 percent in the second, in stark contrast to 1998's projected 5.9 percent decline.

The 2.2 percent growth projection is an upward revision from the two percent forecast by the KDI in October. The revision reflects the broad improvements in the Korean economic condition that have occurred in recent months.

IMF Lauds Korea for Making Progress in Recovery Efforts

The International Monetary Fund on Dec. 14th 1998 praised Korea for ?aking commendable progress in its efforts to achieve economic recovery. In a statement issued after the IMF's Executive Board approved an outlay of $1.02 billion incredit to Korea, the Washington-based funding agency said Korea's severe downturn has begun to moderate and that there are encouraging signs that the Korean economy will return to growth in the forthcoming year. ?he Korean won remains stable and interest rates are at pre-crisis levels. Moreover, Korea's decision last week to start repaying resources borrowed from the IMF was a reassuring signal to the international community that the country is emerging from the crisis, said the IMF's deputy managing director, Alassane D. Quattara.

Korea Posts 2nd Largest Surplus Among OECD Members

Korea posted the second-largest current account surplus among the 29 members of the Organization for Economic Cooperation and Development (OECD) during the first half of 1998, according to a report released by the National Statistical Office Dec. 10th.

Korea's semiannual current account surplus totaled $21.6 billion, second only to Japan, which posted $57.4 billion. In acute contrast, Korea recorded a current account deficit of $8.1 billion at the end of 1997.

Consumer Prices Rise 7.5 Pct in 1998

Consumer prices rose 7.5 percent on average in 1998, the highest rate since 9.3 percent in 1991, but the inflation rate was lower than expected. The Ministry of Finance and Economy (MOFE) said Dec. 29th 1998 that consumer prices in December increased four percent over the same month a year earlier, representing a rapid slowdown from the 6.8 percent gain in November.

December's inflation weakness brought the average inflation rate from January through December to 7.5 percent, just slightly below the 7.9 percent recorded in the Jan.-Nov. period. On a 12-month comparison, consumer prices fell 0.2 percent in December. Last year's inflation rate of 7.5 percent is markedly higher than the 6.2 percent registered in 1994, the 4.5 percent in 1995, the 4.9 percent in 1996 and 4.5 percent in 1997. MOFE pinned the blame for this year's high inflation on the won's steep depreciation in the wake of the currency crisis of late 1997 and on tax increases.

Usable FX Reserves to Top $55 Bil. in 1999

Korea's usable foreign exchange reserves are expected to hit a record $55 billion by the end of 1999, even after the country repays all its maturing external debt, according to a report released by the Ministry of Finance and Economy (MOFE) Dec. 28 1998. The report, which detailed the government's economic policy orientation for the New Year, said contributing factors include the continuing current account surplus, foreign direct investment and fresh funding by overseas banks and corporations.

MOFE says Korea will enjoy a current account surplus of at least $20 billion in 1999, following a total of nearly $40 billion in 1998. In addition, the ministry is predicting foreign direct investment this year will amount to $15 billion.

Vehicle Production Forecast to Increase 14 Pct to 2.4 Mil. in 1999

The Korea Automobile Manufacturers Association (KAMA) is forecasting domestic vehicle production will total 2.4 million in 1999, up 14.3 percent from 1998's estimate of 2.1 million. In a report released in November 1998 on the outlook for the nation's automobile industry, KAMA said its estimate is based on the likelihood of a recovery of domestic sales and exports underpinned by a return to overall economic stability. Domestic sales are forecast to grow 20 percent to 900,000 units in 1999 as the prospect of further layoffs recedes in the second half and disincentives to purchases such as additional taxes on two-vehicle owners are lifted, the report said.

KAMA forecast exports will increase 7.2 percent to 1.45 million units as a result of the improvement in Korea's credit rating and the wider recognition of Korean cars in overseas markets, although emerging markets have slumped and U.S. market growth has slowed.

Economic Recovery Expected in 1st Quarter of 1999: KDB

The slumping Korean economy is expected to bottom out in the first quarter of 1999, the Korea Development Bank (KDB) said in a report Dec. 9th. The forecast is based on a nationwide survey of 1,218 manufacturing firms conducted in November by the state-run KDB.

Average Wages Drop by as Much as W2.3 Mil.

Average wages earned by some categories of Korean worker have fallen by as much as 2.3 million won on an annual basis since the financial crisis began at the end of 1997, the Korea Employers Federation of Korean Industries reported Nov. 25th 1998. According to a survey of 1,300 member companies, the average drop in annual wages was 1.78 million won for workers in manufacturing, construction and finance and insurance. ?hile the wages of managers and new recruits have dropped, those of executives have decreased by even greater margins since they have been virtually forced to return most of their bonuses, one official said.

Volatile Market Sets New Records

The Seoul-based Korea Stock Exchange set a new series of records in 1998 in the midst of sharp fluctuations brought on by financial and economic turbulence. The year 1998 proved that a crisis also represents an opportunity to make money, as far as the Seoul bourse is concerned. However, investors also incurred huge losses on the exchange. The KSE's leading composite price index tumbled below 400 points in December 1997 when economic turmoil forced the previous administration to turn to the IMF for a unprecedented $58-billion assistance package.

In 1998, share prices soared 45.91 percent on average as the composite began the year at 385.49 points on Jan. 3, and closed it at 562.46 points on Dec. 28. The total market value of all listed stocks almost doubled to 137 trillion won from 72 trillion won. Trading volume hit its highest level ever in 1998, when 394.13 million shares were traded Dec. 16th. On the same day, trading value also rose to a record high as shares worth 3.3 trillion won changed hands.

The Ministry of Commerce, Industry and Energy (MOCIE) said Dec.10th 1998 it will adopt new strategies to increase foreign direct investment (FDI) with the aim of boosting its component in Korea's gross domestic product (GDP) to 13 percent by the year 2003. According to ministry officials, accumulated FDI totaled just 2.3 percent of GDP at the end of 1996, and increased only slightly to 3.5 percent in 1997, far below the world average 10.6 percent.

By contrast, ministry statistics indicate FDI in China accounted for 24.7 percent of GDP in 1996, while other developing countries recorded an average of 15.6 percent.

Foreign-Invested Firms Show Better Results

Foreign-invested firms enjoyed much better results in profitability, productivity and financial status than their domestic counterparts in 1998. The Bank of Korea (BOK) said Dec. 22nd1998 that foreign-invested companies showed a ratio of ordinary income to turnover of 3.8 percent in the first half of the year, while the comparable figure for domestic firms was a minus 1.1 percent.

The findings mean foreign-invested firms on average earned 38 won for every 1,000 won in sales while other local firms lost 11 won. The findings were based on a comparison between 1,765 domestic firms and 132 companies, in which foreigners hold a stake of more than 50 percent. ?oreign-invested firms with their lighter debt loads are far more financially sound than their Korean counterparts, said a BOK official. Companies in which foreign investors held a controlling interest had a debt- to-equity ratio of 231 percent, much lower than the 415.8 percent recorded by domestic firms.

Foreign-run enterprises borrowed less and issued a smaller amount of corporate bonds than other domestically-based firms did in the first six months of 1998. The BOK said that the survey demonstrated the bigger the foreign stake is in a firm, the lower will be its debt ratio.

The value-added produced by each worker on average at a foreign-invested corporation amounted to 44.8 million won, in comparison to the 31.9 million won generated by their counterparts at locally-owned firms. The rate for per capita sales growth at foreign-owned companies was 35.6 percent, compared to 24.7 percent for domestic businesses. As of June 30, foreign-invested firms accounted for 7.9 percent of national business turnover and 7.3 percent of the value-added created by all firms doing business in Korea.

Foreign Purchase of Real Estate Soars

After the real estate market was opened wider to foreign participation, foreigners responded by buying real estate worth nearly one trillion won. Since restrictions on foreign purchases of real estate were lifted June 26th, foreigners have bought land worth 920 billion won ($660 million) over the subsequent four months. Altogether, some 904 individual purchases of land by foreigners were recorded over the period involving a total land area of 2.36 million pyong. (9.33 million square yards). This is a 4.4-fold increase over the previous period when the real estate market was virtually closed to foreigners.

By category, 540 cases (60 percent) involved the buying of apartments by overseas Koreans, purchases by individual foreigners totaled 166 cases (18 percent), joint-venture corporations, 136 cases (15 percent), and foreign corporations, 62 cases (seven percent).

IFC Invests in Korean Paper Company

The International Finance Corporation signed a $48 million agreement with Shin Moo Rim Paper Manufacturing Co. Oct. 29th 1998. The transaction was completed in hopes of encouraging other companies to restructure in response to the economic crisis, said IFC Director for East Asia and the Pacific, Javid Hamid.

IFC, a member of the World Bank Group, fosters economic growth in developing countries by financing private sector investments, mobilizing capital in the international financial markets, and providing technical assistance and advice to governments and businesses.

Shin Moo Rim, the nation's leading producer and exporter of high-quality coated paper, will use the funds to refinance its debt load and bring its financial structure up to international standards. The investment, which includes $12 million in equity and $17 million in convertible bonds will also support the completion of a $230 million expansion plan.

Several of the country's airports and harbors will be designated as free trade zones from the latter half of 1999, a move aimed at positioning Korea to become a strategic logistical base for Northeast Asia. The Korea Customs Service said it will consult with the Ministry of Finance and Economy to pass legislation allowing the introduction of free trade zones. A bill on the law will be presented to the special session of the National Assembly during the first half of 1999. The KCS named Kimpo International Airport, Pusan Port, Kwangyang container port and a distribution complex in Inchon as the strongest candidates for designation as free trade zones, where the imposition of customs duties is exempted and customs clearance procedures are nonexistent.

In free trade zones, all tariffs and value-added taxes are exempted and the free movement of merchandise is ensured. Foreign-invested companies located in such zones will also be granted various tax incentives, as outlined in the Foreign Investment Promotion Act.

Seoul to Introduce Class-action Lawsuits From 2000

The government plans to introduce class-action lawsuits from 2000 so investors in securities can sue for compensation in the event of financial losses arising from undue accounting practices and false disclosure on the part of listed companies. To date, investors have only been able to get compensation in such cases through individual lawsuits.

The introduction of the system comes after an agreement between the Korean government and the World Bank was reached in September. Investors will be allowed to file lawsuits when they suffer losses as a result of falsified business plans, securities and open bidding reports.

Trade Surplus for 1999 Set at $25 Bil.

Commerce, Industry and Energy Minister Park Tae-young announced Dec. 13th 1998 the trade surplus would likely reach $25 billion in 1999 as the Japanese yen continues to maintain its strength and Asian markets move toward recovery. Speaking in a television interview, Park said there are many positive factors that will fuel strong export growth next year, including the reduction in the prices of basic industrial materials. ?he completion of the national restructuring program will mean that export industries will recover their competitiveness and domestic consumption will similarly improve, which will also mean higher imports, he said.

Mr. Park forecast that exports will increase 1.4 percent to $135 billion with imports picking up by 18.3 percent to $110 billion to produce a trade surplus of $25 billion, considerably less than the projected $40 billion of 1998.

Sentiment Toward Foreign Investment Changing

A majority of economic specialists believe Koreans have grown more open-minded about foreign investment since Korea entered the International Monetary Fund's restructuring program in December 1999. However, nearly 50 percent of ordinary Koreans still believe there is negative attitude toward such investment. According to a survey conducted by the Korea Development Institute, 79.3 percent of economic specialists said Koreans' sentiment toward foreign capital has become positive since the IMF was called in to restore the economy to health. Of those believing there has been a change in Korean attitudes, 25.9 percent said Koreans have grown significantly more open-minded while 53.4 percent felt only a slight change in attitude is evident.

However, the survey showed that 47.5 percent of ordinary Koreans viewed their fellow citizens as insufficiently open-minded toward foreign investment. It said 50 percent of those polled believe there have been changes in Koreans' sentiment toward foreign capital since the onset of the so-called ?MF era. Some 1,003 ordinary Koreans and 305 economic specialists including academics were polled for the survey from Nov. 13-17.

The Newbridge-General Electric (GE) Capital financial consortium of the United States has been chosen as the buyer of the ailing Korea First Bank (KFB). The Financial Supervisory Commission (FSC) Dec. 30th 1998 exchanged a memorandum of understanding with the consortium to sell 51 percent of the government stake in KFB to the U.S. institution. Newbridge-GE Capital emerged as a successful contender in negotiations for the purchase of the Korean commercial bank, in direct competition to the British-owned Hong Kong Shanghai Banking Corporation (HSBC). The government finally reached an agreement on the sale of the KFB with the U.S. consortium, the commission said. HSBC was known to have offered to take over an 80-percent stake in the KFB against the 51 percent stake offered by the government.