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Investors
waiting for Seoul's reassurance
By Keith W Rabin
Many analysts predicted a weakening South Korean
economy last year in the face of an emerging China, a
slow growing Japan and continuing market turmoil in the
United States. To the contrary, a revitalized Korea
exhibited a strong performance. It attracted substantial
investor interest - and the Korean stock market
registered one of the world's strongest performances
during the first six months of 2002.
This
achievement began to erode, however, during the latter
half of the year and has accelerated in recent months.
The simple truth is that South Korea - no matter how
competitive its economy, and how rapidly it implements
reforms and expands its corporate capabilities - is not
large enough to act as an engine of world growth by
itself.
In a nation seeking to establish itself
as the "dynamic hub of Asia", the perceptions of foreign
investors and business executives matter more than ever
before. Without them, South Korea cannot attract the
physical, human and financial resources needed to
position itself as a global technology and financial
center or to enable its companies to develop the
value-added strategies that are essential to maintaining
the rapid development South Korea has exhibited in the
past.
Rising tensions in the North, increased
media focus on Anti-Americanism, burgeoning consumer
debt and the recent downgrade of Moody's outlook for
South Korea's sovereign credit rating all contribute to
a growing discomfort among international investors and
executives. Their uneasiness is compounded by the recent
election of South Korean President Roh Moo-hyun, who ran
on a populist platform and is largely unknown - not only
outside of South Korea, but also among many local
business leaders. The world therefore nervously watches
to see whether South Korea will continue to deserve its
hard-earned reputation as the Asian country most eager
to embrace reform after the International Monetary Fund
(IMF) crisis and as a result offered some of the world's
most attractive investment and business opportunities.
While Koreans tend to hunker down and turn
inward when faced with adversity that is precisely the
opposite of what is necessary at the present moment.
Korean business and government leaders - if they are to
maintain the good will and positive perception they been
gained in recent years - must reach out and confront the
problems they are facing. Investors are not seeking to
punish South Korea or to retreat from the peninsula.
Like everyone else they are simply seeking the
reassurances they need to justify their decisions.
For example, rising tensions in the North led
Moody's to change its outlook for South Korea's
sovereign credit rating from positive to negative this
month. Their belief is based on the assumption that
increased provocation by the North, which has resulted
in an open resumption of its nuclear effort, heightens
South Korea's security risk and the possibility of a
military response from the United States.
This
development surprised many investors and business and
government leaders. It has raised their anxiety level,
particularly after several months of media coverage
depicting a growing "anti-Americanism" in South Korea.
Several US government leaders have even gone so far as
to question whether it is wise to maintain American
security forces in the nation. One might rightly ask if
Moody's actions and the resulting uncertainty it created
were a key factor leading to an intra-day decline of
over 6 percent earlier this month of the five-day Kospi
index average and whether this is a portent of things to
come.
The answer largely depends on the actions
of South Korea's new government and its corporate
community. The United States until recently was
perceived as a safe haven and in many ways a beneficiary
of global turmoil. This has been changing because of US
economic and corporate excesses as well as the loss of
innocence following the September 11 tragedy. As a
result, international investors and executives, who have
been enduring dramatic losses in dollar-denominated
assets, have by necessity begun to regain their
appreciation for greater international diversification.
This theoretically creates a great opportunity
for Korea-related projects and Korean companies that can
position themselves as globally attractive investment
opportunities - yet it will not happen by itself. Rather
than reach inward, Korea-related entities must reach out
and explain current dynamics from their own perspective
in a way that makes sense and which increases their
attractiveness to the international investment
community.
South Korean opinion leaders need to
emphasize while recent actions by the North are
certainly important and need to be addressed, they do
not represent a fundamental change from the security
dynamics of the past 50 years. They might also point out
the low historical correlation between economic growth
in South Korea and changes in South-North relations.
Furthermore, the rise in what is seen as anti-American
sentiment in the South might be interpreted more as the
inevitable result of a young, maturing, empowered,
growing democratic economy. South Korea's rising stature
and educated workforce is giving rise to a truly dynamic
human resource pool. It is seeking greater
self-expression, not only in its delivery of
cutting-edge products, technologies, corporate
structures and a growing range of cultural exports, but
also as a nation that seeks to determine its national
destiny independently.
It is also worth noting
that South Korea represents an increasingly attractive
consumer market in and of itself. This has helped to
give additional depth and strength to its economy. While
representing a highly positive and important trend over
the long term, Korean leaders need to acknowledge
investor concern over the rapid rise of consumer debt.
Foreign media reports highlight alarming statistics such
as the record 7 percent rise in the average credit-card
default ratio during the third quarter of 2002. Steps
that the Financial Supervisory Service has taken to curb
defaults, including the imposition of limits on cash
advances and higher reserve ratios on lending
institutions, receive far less attention and need to be
emphasized.
To maintain South Korea's continuing
integration as a vital link in the global chain of
commerce and finance, efforts must be made to
communicate both the evolving growth of the nation as
well as the workings of individual entities on the firm
level. By providing well thought-out reasons why foreign
investors and business partners would be wise - not only
to maintain - but to expand their involvement with
Korean enterprises, in addition to explaining the
factors that drive their behavior, investors will be far
more likely to understand that volatility moves in both
directions.
This will help to lead them to the
conclusion that current tensions with the North and
other economic problems in the face of a global slowdown
are only temporary interruptions in the long-term growth
pattern that South Korea has consistently exhibited for
more than half a century. Therefore, they will come to
understand that any present trend downward, which may
continue in the current incendiary environment,
represents nothing more than a long term buying
opportunity.
Keith W Rabin serves as
president of KWR International, Inc. KWR
International is a consulting firm specializing in the
delivery of research, public/investor relations and
advisory services, with a particular emphasis on Korea
and the Asia-Pacific region. He can be reached at
krabin@kwrintl.com.
This article is posted with
permission.
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