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Korea: Still the best
comeback story in Asia
By Jonathan
Lemco
Since the
Asian financial crisis of 1997-98, South Korea has
made
the greatest tangible
effort to restructure its financial-services industry,
reform its chaebol, and improve public policy making.
The leading international credit-rating agencies have
taken notice, and have raised the nation's sovereign
credit rating to A3 (Moody's) and A- (Standard and
Poor's). This is the highest rating of any of the Asian
nations most affected by the financial crisis four years
ago.
It also reflects the fact that South Korea
has now graduated from the ranks of the "emerging
markets" to "developed" economy status. This is not to
suggest that there is not more work to be done.
Inefficiencies remain in the financial, economic and
political system. But the progress made thus far has
been admirable.
Looking forward to the final
months of 2002, we expect South Korean economic growth
to slow but to remain fundamentally healthy. Exports are
poised to continue demonstrating strength, having
increased by 19.9 percent year-on-year in July and
August. Furthermore, South Korea's solid external
balance sheet is reinforced by its strong net
foreign-asset position of US$44.3 billion in July.
Government finances are stable and in balance. The
annualized fiscal surplus is currently at about 2
percent of gross domestic product (GDP), and surveys of
leading financial economists reveal that the Korean
budget surplus is likely to be in the 1.4 percent range
in FY (full year) 2002. At this time, inflation is not a
serious worry. The core Consumer Price Index (CPI) was
up by 2.8 percent in August, and has been consistent
throughout the year.
To the extent that there is
reduced economic activity in 2003, it will likely be due
to global weakness rather than any general stagnation in
the South Korean economy. Domestic demand was down from
the torrid pace of the first quarter of 2002. We expect
Korean growth of about 6 percent in FY 2002 and 5.6
percent in FY 2003. It was 6.3 percent in August. Under
current economic circumstances, this is quite robust for
an industrialized nation.
Furthermore, the
government is cutting back on its economy-boosting
infrastructure spending, such as for roads and other
civil engineering projects, as the economy improves.
Government spending rose 4.9 percent in the second
quarter of 2002, compared with 5.5 percent in the first
quarter.
There are obvious challenges to the
South Korean economy, of course. On the political front,
the December presidential election is too close to call
among three viable candidates. Furthermore, relations
between North and South Korea, although much warmer of
late, will remain unpredictable for the foreseeable
future.
It should also be noted that some
analysts have suggested that if oil prices spike up due
to a potential invasion of Iraq and the consequent
turmoil that might follow, a big "if", then South
Korea's current account could be pushed into a deficit
of minus-1.0 percent of GDP in 2003. This is because as
oil imports increase and exports weaken, global growth
could soften. Higher oil prices would effect Korean
domestic consumption, production costs, and net exports
such that GDP growth in 2003 could deteriorate by 0.8
percent. In addition, the balance-of-payments surplus
that allowed South Korea to accumulate $116 billion in
foreign-exchange reserves could fall. But we are not
forecasting dramatic increases in oil prices for the
foreseeable future. This is because it is most unclear
at this time that there will be an invasion and, even if
there is, it is also the case that Iraq exports only a
fraction of the oil that it did before sanctions were
imposed.
So South Korea remains one of the best
economic stories in Asia. Unemployment remains
relatively low at 3.0 percent. Also, South Korea has
developed a consumer culture that was absent before the
crisis. Credit cards are used everywhere and consumer
debt is increasing at a pace typical of Organization of
Economic Cooperation and Development levels. But South
Korea's high savings rate (32.4 percent in 2000), its
strong household balance sheets, and the resilient
underlying economy suggest little reason for concern
about the sustainability of the debt.
In
addition, the nation's financial institutions continue
to improve their balance sheets, although much work
remains to be done in this regard. Non-performing assets
have been substantially reduced though sales, writedowns
and restructurings. Overall, capital at the nation's
banks has risen 22 percent since 1998 and non-performing
loans have dropped to just 4.1 percent of total loans
(down from an "official" peak of 18 percent of loans in
1998 and an "estimated" peak of 25 percent).
We
are confident that barring global calamity, South Korea
will remain an economic powerhouse in Asia. In fact,
since the end of the financial crisis, investors have
been amply rewarded for their confidence in the Korean
credit.
Dr Jonathan Lemco is director
and senior consultant for the KWR International
Advisor KWR International, Inc (KWR)
is a consulting firm specializing in the delivery of
research, communications and advisory services with a
particular emphasis on public/investor relations,
business and technology development, public affairs,
cross-border transactions and market entry programs.
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