SOUTH KOREA ECONOMIC BRIEFING - AUGUST 2009

UNCLAS SECTION 01 OF 03 SEOUL 001402 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ENRG ETRD KS SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - AUGUST 2009 ¶1. (U) This cable is sensitive but unclassified and not/not intended for Internet distribution. -------------- In This Issue -------------- -- Producer Prices Reverse Course, Rise on Monthly Basis -- July Consumer Inflation Slowed -- Household Debt Risks Expected to Rise -- FX Reserves Continue to Rise in July -- Facility Investment Down 20 Percent in H1 -- Expansionary Macro Policy until Economic Recovery Clear -- Industrial Production Posts Six-Month Increase -- Korea to Become Net Creditor Soon -- Capital Inflow by Ethnic Koreans Triples -- IMF Raises Forecast for the Korean Economy -- ADB Predicts V-Shaped Economic Recovery for Korea -- BOK Keeps Interest Rate at Two Percent -- Foreign Currency Deposits Rise to Record High -- Domestic Banks' Profit Rebounded in Q2 -- ROKG Tightens Banks' Bad Loans -- Domestic Banks' Foreign Borrowing Nearly Triples in H1 Domestic Economy -------------- ¶2. (SBU) Producer Prices Reverse Course, Rise on Monthly Basis: The Bank of Korea (BOK) said that producer prices for July rose 1.2 percent from June, the highest monthly jump since July 2008. Prices for agriculture/forestry/fisheries products rose 5.7 percent from the previous month and those for electricity/water/gas increased 5.3 percent for the same period. Industrial products rose 0.9 percent and the service sector edged up 0.3 percent. These producer prices, however, fell 3.8 percent from a year earlier, marking a third consecutive year-on-year decline on a monthly basis. ¶3. (SBU) July Consumer Inflation Slowed: According to the National Statistical Office (NSO),consumer prices in July rose 1.6 percent from a year earlier (up 0.4 percent from the previous month), posting the smallest year-on-year gain since May 2000 (1.1 percent), due to a combination of the base effect (from a 5.9 percent rise in July 2008),stability in foreign exchange rates and sluggish private consumption. The NSO forecasts that future consumer prices will show overall stability but may edge up slightly as raw material prices increase along with a recovery of the economy. ¶4. (SBU) Household Debt Risks Expected to Rise: Samsung Economic Research Institute (SERI),a leading private think tank, said the risks from household debt may approach a record high. SERI senior researcher Jeong Young-sik said households face great risk as demonstrated by the Household Credit Risk Index (HCRI),which attempts to measure the risk of real estate default by homeowners. The HCRI, which is created by SERI, usually lies below 1 but climbs above the benchmark when household debt becomes hazardous. For example, in the first quarter of 2003, the index reached 1.63 as a credit card bubble burst. The index got back on track as the economy stabilized before surging to 1.48 over the fourth quarter of 2008 during the global financial crisis. The HRCI dropped to 0.33 in the first quarter of this year and 0.59 in the second quarter as interest rates were low but the figure could move as high as 1.56 by the end of this year, Jeong said. ¶5. (SBU) FX Reserves Continue to Rise in July: With continuing current account surpluses and the absorption of foreign currency liquidity by the government, Korea's FX reserves swelled by USD 5.78 billion from a month earlier to USD 237.51 billion at the end of July, the BOK announced. After a fifth consecutive monthly rise in FX reserves in July, attention has been focused on whether the record high of USD 264.25 billion set at the end of March 2008 will be surpassed within the year. Private research institutes expect that the FX reserve will continue to increase in the second half of this year. ¶6. (SBU) Facility Investment Down 20 Percent in H1: The BOK reported that facility investment amounted to 37.71 trillion won SEOUL 00001402 002.2 OF 003 (USD 29.9 billion) in the first half, shrinking 9.56 trillion won (USD 7.6 billion),or 20.2 percent from a year earlier and marking the largest decline since the Asian currency crisis in 1998 (-44.9 percent). While facility investment showed some recovery in June, the central bank forecast investment growth for 2009 at -15.1 percent. ¶7. (SBU) Expansionary Macro Policy until Economic Recovery Clear: The MOSF announced on August 7 that economic indicators for the second quarter improved rapidly, but most still remained below pre-crisis levels. The finance ministry also said, "Expansionary macroeconomic policy will be maintained until the private sector shows a clear recovery on its own." ¶8. (SBU) Industrial Production Posts Six-Month Increase: The NSO announced that industrial production in June rose 5.7 percent from the previous month, marking the sixth consecutive monthly increase. Also, the average capacity utilization of the manufacturing sector rose for the fifth straight month to 76.5 percent in June. Services grew 1.7 percent from -0.9 percent in May. ¶9. (SBU) Korea to Become Net Creditor Soon: According to the BOK on August 19, Korea's external liabilities increased by USD 11 billion to USD 380.12 billion as of the end of June from three months earlier, with short-term debt accounting for 38.7 percent of the total, down from 39.6 percent. The ROK's external credits stood at USD 372.56 billion, up USD 27.5 billion during the three-month period, boosted by increasing foreign currency reserves. As a result, the nation's net external liabilities fell to USD 7.56 billion as of June, down sharply from USD 16.5 billion in March. The central bank predicts a net external credit balance within this year, projecting a continuation of recent trade surplus and profit gains from leading exporters. Unit: USD Million Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 -------------- -------------- -------------- -------------- -------------- -------------- External Debt 421,657 425,516 381,057 369,141 380,116 1.Short-term 176,184 189,598 151,060 146,107 147,253 2.Long-term 245,473 235,918 229,997 223,034 232,864 General Gov. 32,897 24,244 21,141 19,042 20,355 Monetary 30,143 28,591 30,046 33,780 35,921 Authorities Banks 211,490 220,799 171,720 161,842 168,019 Other Sectors 147,126 151,881 158,151 154,477 155,821 Ext. Credits 423,939 401,552 348,424 345,066 372,561 1.Short-term 336,351 319,921 279,598 278,421 303,624 2.Long-term 87,588 81,630 68,826 66,645 68,937 Net External Credits 2,282 -23,964 -32,633 -24,075 -7,555 1.Short-term 160,167 130,323 128,538 132,314 156,371 2.Long-term -157,885 -154,288 -161,171 -156,389 -163,927 (Source: Bank of Korea) ¶10. (SBU) Capital Inflow by Ethnic Koreans Triples: Ethnic Koreans residing overseas sent a record amount of dollars to the ROK in the first half of the year to take advantage of the weakened Korean won and discounted property prices in the wake of the global economic crisis. According to the BOK on July 27, the accumulated inbound capital transfer for the first six month of this year reached USD 1.61 billion, 3.5 times more than that in the same period of 2008. The amount is 16 times and 23 times larger than what Korea received from abroad through capital transfers of ethnic Koreans in 2007 and 2006, respectively. Meanwhile, many ethnic Koreans kept money in the ROK rather than took it out of the country. The central bank said the outbound capital transfer totaled USD 601 million in the first half this year, down 26.6 percent from USD 820 million in the same period last year. Finance and Structural Policies -------------- ¶11. (SBU) IMF Raises Forecast for the Korean Economy: The International Monetary Fund (IMF) on August 10 forecast Korea's economic growth for 2009 at -1.8 percent, 1.2 percentage points SEOUL 00001402 003 OF 003 higher than its forecast a month earlier. The IMF left its forecast for 2010 ROK GDP growth unchanged at 2.5 percent. In April this year, the IMF predicted that the Korean economy would shrink by 4.0 percent and 1.5 percent in 2009 and 2010, respectively. ¶12. (SBU) ADB Predicts V-Shaped Economic Recovery for Korea: The Asian Development Bank (ADB) forecast that the Korean economy will shrink by 3.0 percent this year, and reverse course to grow by 4 percent in 2010. This 2010 forecast is higher than projections made by the Bank of Korea (3.6 percent),the International Monetary Fund (2.5 percent) and Morgan Stanley (3.8 percent). The ADB also stated that ten ASEAN countries and Korea, China and Taiwan will bottom out with 3.0 percent growth this year and recover to the 2008 level of 6.0 percent in 2010. ¶13. (SBU) BOK Keeps Interest Rate at Two Percent: The BOK's Monetary Policy Committee on August 11 decided to hold the benchmark interest rate at 2.0 percent, freezing the rate for the sixth consecutive month. The decision was based on uncertainty about future economic growth despite evidence of recovery beginning in the second quarter. ¶14. (SBU) Foreign Currency Deposits Rise to Record High: According to the BOK, the total amount of foreign currency deposits held by Korean nationals and foreign residents stood at a record high of USD 31.25 billion as of the end of July, swelling by USD 2.98 billion from the end of June. Foreign currency deposits grew USD 4.52 billion from the previous month as foreign currency bonds issued by state-owned companies reached a total of USD 3.4 billion for the same period. ¶15. (SBU) Domestic Banks' Profit Rebounded in Q2: The Financial Supervisory Service (FSS) announced that domestic banks made a net profit of 2.3 trillion won (USD 1.9 billion) in the second quarter, up 1.7 trillion won (USD 1.4 billion) or 302 percent from the previous quarter. Meanwhile, the banks made a net profit of 2.8 trillion won (USD 2.2 billion) in the first half of 2009, down 3.8 trillion won (USD 3 billion),or 57.4 percent, from a year ago. ¶16. (SBU) ROKG Tightens Banks' Bad Loans: At an emergency economic measures meeting chaired by President Lee Myung-bak on July 30, the Financial Services Commission (FSC) stated that banks will be required to lower their bad loan ratios to 1.0 percent by the end of ¶2009. As of the end of June, the average bad loan ratio for banks was 1.5 percent. Accordingly, banks will have to clear from their books bad loans worth about 20 trillion won (USD 16 billion) from August until the end of the year. Separately, the FSS said bad loans held by the entire financial sector totaled 31.2 trillion won (USD 25 billion) as of the end of March, up 5.8 trillion won (USD 4.6 billion) or 22.8 percent from the end of 2008. ¶17. (SBU) Domestic Banks' Foreign Borrowing Nearly Triples in H1: According to the FSS, the mid- and long-term foreign currency loans of domestic nationwide banks totaled USD 14.02 billion in the first half, nearly three times that of the second half of 2008 (USD 4.85 billion). As for loans with maturities of one year or shorter (excluding overnight loans),the ratio of maturing foreign currency loans to new loans was 99.0 percent in the first half of 2009, higher than the first and second half of 2008 (97.6 percent and 75.0 percent). The FSS noted domestic banks with large foreign credit lines are unlikely to have serious problems in foreign currency liquidity for the present. TOKOLA