TOKYO
- Only two years ago South Korea - with its vibrant
economy and pop culture - was the toast of North Asia.
But yesteryear's boom, fueled in no small part by a
massive credit splurge by Korean consumers, is today's
economic funk.
Between 1999 and 2003,
the level of credit-card debt more than quintupled.
Consumers, who make up half the country's gross domestic
product (GDP), are now nursing a financial hangover as
they struggle to come to terms with their debts.
Consumer spending has been on a downward tangent for
much of the year as Koreans tighten their belts and
close their wallets. Even normally robust sectors, such
as educational spending, have taken a hit.
Driven by brisk demand from the United
States and China, the twin turbines of economic growth,
the favorable economic conditions that most of Asia
is enjoying seems to have bypassed the average
Korean. While the average Japanese worker's confidence
has climbed in the last six months, according to a survey
by RightCoutts, a British human-resources firm, Korea's
Misery Index - the combined unemployment and inflation
figure, and a good gauge of economic confidence - has
climbed recently to a 38-month high of 8.1. This may be
short of the eye-watering 14.5 it hit in 1998, but for
most Koreans that comes as little consolation.
Still, it's not all bad news for the South Korean
economy. While the Korean consumer may not be enjoying
the fruits of the global economy, large Korean
corporations at least are. Trade- and export-dependant
Korean firms, especially in the electronics and auto
sectors, are riding the wave of strong demand in the US
and China. The auto sector is expecting a healthy 24%
surge in exports to a record high of 2.25 million units
this year, which should help counter the predicted 16.5%
plunge in domestic sales to 1.1 million units, the
second worst figure since the financial crisis of 1998.
But while exports remain the bright spot in an
otherwise gloomy economic picture, storm clouds could be
gathering on the horizon even here. South Korea's
exports rose 21% to US$22.9 billion last month. That may
sound impressive but it was the smallest rise in 11
months. A large part of the slowdown can be attributed
to the falling dollar, which has gathered particular
steam over the last few weeks. While the dollar has
plunged against most regional currencies, the won's
appreciation has been stronger than most. The South Korean
currency hit a seven-year high against the dollar
earlier, trading at 1,081.3, and has risen by 9% against
the greenback this year.
This has gotten
companies and policy makers worried. A strong won makes
Korean exports uncompetitive, especially in the key US
market. But worries about the uncompetitive won don't
just stop there for businessmen and politicians in
Seoul. Neighboring China puts an extra and nasty spin on
South Korea's currency headache. With the yuan pegged to the
dollar, China has not been exposed to the full pain of a
plunging dollar. Instead, its export machine has become
more competitive against its South Korean neighbor. And as the
icing on the cake, China is now South Korea's largest trading
partner, making Korean exports dearer in China and
Chinese imports cheaper.
Small and medium-sized
companies are suffering and, according to a survey by
the Korean Chamber of Commerce, more than half the
exporters would not be able to cope with the current
exchange rate if it were to endure. Admittedly, the
dropping dollar has helped offset some of the extra
headaches associated with current strong commodity
prices, such as in oil, which are priced in dollars, but
not enough to stave off inflationary pressures on the
Producer Price Index (PPI), which saw a 7.5% gain in
September. Spiraling commodity prices are expected to
chip away at corporate profits. And it was only thanks
to a surge in food imports from China that the Consumer
Price Index (CPI) dropped slightly, to 3.8%, in October.
All this has raised the prospect that South Korea
could be plagued by stagflation - low growth and high
inflation. Most economists certainly think the
government target of 5% economic growth is unlikely to
be met next year, with the economy probably growing by
about 4.1-4.4% instead. Much of the slowdown is due to
falling exports.
But stagflation fears may be
premature. Inflation, while above the Bank of Korea's
2.5-3.5% target range, has been dropping from its peak
this year of 4.8% in August. The central bank - having
cut interest rates to 3.25% last week in a bid to boost
growth - also thinks that inflation is less of a worry
for the moment. UBS, an investment bank, thinks further
cuts may be in store to prop up the economy.
While trade-reliant South Korea may be
particularly vulnerable to external shocks, its exchange-rate
and inflationary problems are to some degree of its own
making. Like many Asian countries, South Korea has pushed
export-driven growth. By buying large amounts of dollars,
it has not only kept its currency undervalued but
has also funded the United States' large current-account
deficit, which is now coming back to haunt it.
But fortunately, all this means
the government does have some useful ammunition: its
large budget surplus and lots of dollars to sell. This
should help pay for a planned 1% cut in income tax for next
year as well as some of its recently unveiled "New
Deal" to jumpstart domestic demand. Despite the
gloom, not everybody is convinced that the South Korean economy
will be trapped in the doldrums. The International
Monetary Fund issued an upbeat assessment amid all
the downbeat predictions at the end of October, stating
it was optimistic about South Korea's future and that the
economy was "undergoing a period of adjustment" after its
credit-card-fueled boom. But it attached the important caveat
that a recovery was dependant on the government taking
proactive measures to set the ball rolling.
(Copyright 2004 Asia Times Online Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication
policies.)
