South Korea
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Getting It Right
By SEAH PARK
SEOUL -- South Korea turned its economy into one of the world's most dynamic in the past year, fueled by a domestic consumption boom and the restructuring of massive family-owned conglomerates, known as chaebols.
Indeed, the International Monetary Fund and credit-rating agencies such as Moody's are citing Korea as a model for how crisis-hit countries should reform.
But sustaining this growth will prove a challenge, as a war in Iraq and a soft U.S. economy could undercut South Korean companies' sales. The biggest question is whether the purchase of new homes, cars and vacations can continue without overheating the economy.
South Korea's economic performance for 2002 far surpassed what most economists projected a year ago. The country's gross domestic product rose by 5.8% in the first quarter and 6.3% in the second quarter this year. Bank of Korea, South Korea's central bank, projects the GDP growth rate for this year will average 6% or more, far above its original projection of just 3.9%.
Successful Restructuring
"The rebound of exports and consumer boom, particularly in residential investments, have largely contributed to South Korea's economic growth this year," says Thomas J. Byrne, Vice President and senior credit officer at Moody's.
South Korea: Economic Overview
The growth has been underpinned by the continuing restructuring of the country's banks and companies, a process many feared would stall ahead of this year's presidential election. According to the Financial Supervisory Service, the bad loans-or the loans which fall under the category of "substandard" held by domestic financial institutions -- shrank by 15.5% in the second quarter of this year. Chaebols also continued to sell their non-performing businesses and improve their balance sheets. A report by the Financial Supervisory Commission shows a 15.3% increase in net profits this year among the 21 remaining "workout companies," or those under the government-led restructuring plan.
Companies such as Samsung Electronics Co. stand out for restructuring without any government support. Samsung laid off 16,000 employees between the end of 1997 and 1998 in an effort to cut down its costs. The company also sold unprofitable assets and refocused on their core technology businesses.
The company's debt-equity ratio dropped from 296% as of the end of 1997 to 39% in the year 2002. At the same time, Samsung has also tried to enhance its competitiveness by increasing R&D in technology and design. The company is the world's leading producer of memory chips, LCD screens, digital TVs and cellular phones.
Private consumption is also driving growth, fueled by the government's low interest-rate policy. The average call rate of the first nine months of 2002 was down to 4.125%, from 4.7% for the year-earlier period. Local commercial banks experienced a sharp rise in their household loans.
The policy, however, is being scrutinized as new problems may emerge-real-estate speculation and skyrocketing real-estate prices, for example. It shows a different pattern from Japan in the 1980s or Hong Kong in the 1990s, though. Japan's real-estate bubble in the 1980s involved investors at almost every level: household, financial and corporate investors purchasing buildings and land. By contrast, the recent real-estate boom in Korea is confined to a few residential areas in Seoul and private investors at the household level.
Stable Interest Rates
While opinions vary over the possible impact of any interest-rate increase next year, there seems to be agreement on the point that the interest rate is unlikely to be raised dramatically in the near future. This is due to fear about the outbreak of war between the U.S. and Iraq, a subsequent rise in oil prices, and a possible global economic recession. Samsung Economic Research Institute and LG Economic Research Institute, the leading think tanks in Korea, each project the country's gross domestic product to rise by 5.8% and 5.6% next year. According to Kim Gi Seung, a research fellow at LG Economic Research Institute, the government isn't likely to raise the interest rate in a short time lest it lead to an economic contraction.
However, Korea may suffer a slump in export if the U.S. economy falls into a double-dip recession; the U.S. absorbs about 20% of the country's exports, although South Korea's trade volume to China increased slightly this year. However, sound regional economies, particularly China, Taiwan, Hong Kong and Singapore, can underpin Korea's exports next year, says Lee Keun Mo, Senior Vice President of Goodmorning Shinhan Securities Co. in Korea.
--Ms. Park is a staff reporter in The Wall Street Journal's Seoul bureau.
Write to Seah Park at seah.park@wsj.com
Updated October 28, 2002 |
