SOUTH KOREA ECONOMIC BRIEFING - JULY 2009

UNCLAS SECTION 01 OF 03 SEOUL 001177 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ENRG ETRD KS SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - JULY 2009 ¶1. (U) This cable is sensitive but unclassified and not/not intended for Internet distribution. -------------- In This Issue -------------- -- South Korea's GDP Ranking Falls to Fifteenth Highest -- Inflation Rate Slows to 2 Percent in June -- Producer Prices Fall in June -- Trade Surplus Reaches USD 21.1 Billion in First Half -- National Growth Potential Drops by One Percent in 2009 -- ROKG's Budget to Contract Sharply in Second Half -- Foreign Currency Reserves Rise to USD 231.7 Billion -- IMF and OECD Revise Forecasts of ROK GDP for 2009 and 2010 -- BOK and ROKG Predict Faster Economic Recovery in Second Half -- ROKG Picks 26 Projects for New Growth Engines -- Korean Firms to Increase Investments in Second Half -- ROKG to Create Facility Investment Fund -- U.S. FED and BOK Agree to Extend the Currency Swap Agreement -- BOK Freezes Benchmark Interest Rates at 2 Percent Domestic Economy -------------- ¶1. (SBU) South Korea's GDP Ranking Falls to Fifteenth Highest World: Bank data released in July showed that Korea's nominal Gross Domestic Product (GDP) totaled USD 929.1 billion in 2008, falling to fifteenth highest from fourteenth in 2007 in the World Bank's GDP ranking of 186 countries. Korea was ranked eleventh highest in 2003 but has been surpassed by India, Brazil, Russia, and Australia. Korea's nominal gross national income (GNI) ranking was unchanged at 14th place with USD 1.05 trillion. Korea's GDP is expected to grow with economic recovery in 2010. ¶2. (SBU) Inflation Rate Slows to 2 Percent in June: According to the National Statistical Office (NSO),consumer prices rose 2.0 percent in June from a year earlier, recording the slowest yearly growth since August 2007. The slowdown in consumer price growth is attributed to the lower prices of oil and other raw materials. Consumer prices fell 0.1 percent in June from May. Prices of agricultural and fishery products tumbled 4.8 percent from May due to an increase in supply. ¶3. (SBU) Producer Prices Fall in June: The Bank of Korea (BOK) reported that producer prices fell 0.3 percent in June for the second consecutive month. Prices of agricultural, forestry, and fishery products fell the most, tumbling 9.6 percent in June. Producer prices fell 3.1 percent from a year earlier as a result of lower oil prices and stagnant domestic demand. Producer prices are a leading indicator of future consumer price growth. ¶4. (SBU) Trade Surplus Reaches USD 21.1 Billion in First Half: According to the Korea Customs Service (KCS),the trade surplus for the first half of this year was USD 21.1 billion. This was a record surplus as imports decreased faster than exports. Exports fell 22.6 percent, year-on-year to USD 165.7 billion and imports tumbled 34.5 percent to USD 144.6 billion. The KCS attributed the steep decline in imports this year to lower oil prices. (Unit: USD million) Jun-08 Jun-09 Change(%) H1 08 H1 09 Change(%) TRADE BALANCE -569 7,270 -6,909 21,096 Total Exports 37,259 32,634 -12.4 213,937 165,668 -22.6 --Home Appliances 450 882 96.0 2,777 4,802 72.9 --Vessels and etc. 2,823 5,065 79.4 18,069 3,805 31.7 --Others 33,986 26,687 -21.5 193,091 137,061 -29.0 Total Imports 37,828 25,364 -32.9 220,846 144,572 -34.5 --Oils 8,386 3,748 -55.3 44,142 20,592 -53.4 --Iron and Steel 3,229 1,506 -53.4 17,468 10,013 -42.7 SEOUL 00001177 002 OF 003 --Others 26,213 20,110 -23.3 159,236 113,967 -28.4 (Source: Korea Customs Service) ¶5. (SBU) National Growth Potential Drops by One Percent in 2009: In a press meeting on July 14, Director General Yoon Jong-won, head of the Economic Policy Bureau of the MOSF, revealed that Korea's potential growth rate may drop by about one percentage point to the 3 to 4 percent range this year. He also said, "The potential growth rate is expected to improve slowly from the end of next year but the pace of recovery will depend on efforts in investment and employment." Korea Development Institute, Samsung Economic Research Institute and other think tanks also warned of Korea's growth potential weakening further as a result of sluggish investment and productivity this year. ¶6. (SBU) ROKG's Budget to Contract Sharply in Second Half: The MOSF reported that the government has spent 160.8 trillion won (USD 123.7 billion) of its original and supplementary budgets during the first half of 2009, with only 111.9 trillion won (USD 86.1 billion) remaining for the second half. MOSF plans to scale back government spending in the long-term but will maintain its current expansionary fiscal policy to bolster economic recovery. While some experts warn that the fiscal stimulus will run out steam in the remaining six months of the year, others, more concerned with inflationary risks, are pleased that ROKG spending will begin to taper off in the second half. ¶7. (SBU) Foreign Currency Reserves Rise to USD 231.7 Billion: The BOK announced that Korea's foreign currency reserves reached USD 231.73 billion at of the end of June. Foreign reserves swelled USD 4.96 billion during the month and recorded the largest amount since the end of September 2008 (USD 239.67 billion). During the first half of the year, the reserves increased USD 30.51 billion, a record high for a six month period. The central bank forecasts foreign currency reserves to continue growing as the current account surplus is expected to continue. Finance and Structural Policies -------------- ¶8. (SBU) IMF and OECD Revise Forecasts of ROK GDP for 2009 and 2010The International Monetary Fund (IMF) on July 7 released its most recent forecast, calling for the Korean economy to contract 3 percent in 2009 and grow 2.5 percent in 2010. It raised the forecast for each year by one percentage point from its previous projection. "Thanks to the Korean government's comprehensive and swift fiscal, monetary and financial policies, the Korean economy has bottomed out and wisely avoided a liquidity crisis and credit crunch," the IMF said. The IMF sees economic growth continuing but slowly in 2010 and recommended Korea to continue its current expansionary policy through 2010. Meanwhile, the Organization for Economic Cooperation and Development (OECD) released its outlook on June 24 forecasting that Korea's GDP will contract 2.2 percent in 2009 and grow 3.5 percent in 2010, the best performance among OECD member countries. The OECD composite leading indicator (CLI) for Korea rose to 99.8 in May, up 2.2 points from 97.6 in April. It was the sixth consecutive increase since posting 90.2 in November 2008. ¶9. (SBU) BOK and ROKG Predict Faster Economic Recovery in Second Half: The BOK forecasts the economy to grow 0.2 percent in the second half of 2009 from a year earlier. It revised its projection of a 0.6 percent contraction in April as the economy shows signs of increase in domestic and overseas demand. The economy shrank 3.4 percent in the first half of the year as the BOK expected. The BOK also revised its projection upward for the economy to contract 1.6 percent in 2009 from a 2.4 percent contraction in April. The economy is expected to grow 3.6 percent in 2010 as the global economy recovers and domestic and overseas demand increase. It is the most optimistic outlook for 2010 thus far. On June 25, the MOSF raised its GDP forecast for 2009 to a 1.5 percent contraction from its previous projection in April of a 2 percent contraction. Strong performances in the mining, manufacturing, electric, and gas industries are expected to boost economic growth in the second half. ¶10. (SBU) ROKG Picks 26 Projects for New Growth Engines: The SEOUL 00001177 003 OF 003 Ministry of Knowledge Economy (MKE) announced 26 smart projects in new growth engines. The government will finance the research and development of these projects which will be taken on by both large conglomerates and several small and medium-sized enterprises (SMEs). A total of 155 billion won (USD 119 million) will fund projects in eight major fields including biopharmaceuticals (USD 23 million), environmentally-friendly cars (USD 23 million),light-emitting diode (LED) applications (USD 19 million),system semiconductors (USD 18 million),and robotic applications (USD 8 million). A consortium led by Samsung Electronics was designated for a biopharmaceutical project. ¶11. (SBU) Korean Firms to Increase Investments in Second Half: The Korea Chamber of Commerce and Industry (KCCI) conducted a survey on facility investment plans of 1,000 domestic companies for the second half of 2009. The survey revealed that companies plan to increase their investment in facilities by an average of 3.0 percent in the second half of the year. Facility investment fell 7.9 percent year-on-year in the first half of the year as a result of the economic and financial crisis. Factors behind the increase in investment are: production of new products and technological development (24.0 percent),preparation for the future (23.6 percent),improvement in aging facilities (18.3 percent),and recovery of domestic demand or exports (17.1 percent). Companies in the electric power and gas sector accounted for the largest portion (11.1 percent) of those planning investment. ¶12. (SBU) ROKG to Create a Facility Investment Fund: At a meeting between President Lee Myung-bak and corporate CEOs, the government revealed its plans to stimulate business investment and job creation. The government plans to establish a 10 trillion won (USD 7.6 billion) facility investment fund. It plans to use 5 trillion won (USD 3.8 billion) in lending from the Korean Development Bank (KDB),the Industrial Bank of Korea (IBK), and the National Pension Service (NPS) by August and another 5 trillion won (USD 3.8 billion) from KDB and IBK at a later time. In addition, the government plans to increase tax credits for R&D investments in new growth engines and core technologies. Large companies may be able to deduct up to 25 percent of R&D investment in core technologies from taxable earnings, while small companies may be able to deduct up to 35 percent. 13 (SBU) U.S. Fed and BOK Agree to Extend the Currency Swap Agreement: On June 26, the U.S. Federal Reserve announced a three-month extension of its currency swap agreement with the BOK to February 1, 2010. "The BOK expects that this action of extending its swap agreement with the Federal Reserve will contribute to the continuing stability of the foreign currency funding market in Korea," said a BOK official. ¶14. (SBU) BOK Freezes Benchmark Interest Rates at 2 Percent: The BOK Monetary Policy Committee on July 9 decided to freeze the benchmark interest rate at an annual level of 2.0 percent as expected. Consumption and investment are still weak and uncertainties regarding economic growth in the second half of the year remain. BOK Governor Lee Seong-tae expects economic recovery to be slow in the second half. The benchmark interest rate was cut from 5.25 percent to 2.0 percent between October 2008 and February this year. The rate has been left unchanged for five consecutive months to boost economic recovery. STEPHENS