SOUTH KOREA ECONOMIC BRIEFING - DECEMBER 2009

UNCLAS SECTION 01 OF 03 SEOUL 002006 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ENRG ETRD KS SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - DECEMBER 2009 ¶1. (U) This cable is sensitive but unclassified and not/not intended for Internet distribution. In This Issue -------------- -- Economy Records 3.2 Percent Quarterly Growth -- ROKG, IMF Optimistic About 2010 -- ROKG Plans to Expand Stake in IMF and World Bank -- ROKG Plans "Business Summit" for G20 -- Labor Productivity Below OECD Average -- Consumer and Business Sentiment Down -- South Korea Joins OECD Development Committee -- Central Bank to Adopt Broader Inflation Target in 2010 -- Double-Digit Export Growth Buoys MKE Plans for Trade -- Job Market Falls for First Time in Four Months -- Central Bank Maintains Key Rate at Two Percent -- ROKG to Propose Regulation of Global Capital Flow -- Samsung Opens Micro-credit Bank Domestic Economy -------------- ¶2. (SBU) Economy Records 3.2 Percent Quarterly Growth: The BOK announced December 11 that real GDP for the third quarter grew 3.2 percent from the previous quarter, representing the largest quarter-on-quarter growth since the first quarter of 2002. The year-on-year change was an increase of 0.9 percent. Meanwhile, the third quarter's real gross national income (GNI) rose 0.4 percent from the second quarter. ¶3. (SBU) ROKG, IMF Optimistic About 2010: The ROKG, IMF, and other observers project ROK economic growth of between 4.3 and 5 percent for 2010. The Bank of Korea (BOK) on December 10 forecast 4.6 percent GDP growth, with projected growth of 0.7 percent in the first half of 2010 compared to the latter half of 2009. It also predicted economic growth to be driven by the private sector in 2010. The BOK said GDP in the fourth quarter of 2009 would rise 0.3 percent from the previous quarter and 0.2 percent year-on-year. Meanwhile, during a December 7 visit to Korea, an International Monetary Fund (IMF) delegation said Korea bears no risk of a double dip recession and should be ready to normalize monetary stimulus measures in a few months, perhaps by raising the benchmark interest rate as a possible step. The IMF forecast Korea's GDP growth to be 0.25 percent in 2009, the highest projection among major international organizations. For 2010, the IMF raised its forecast from 3.6 percent to 4.5 percent growth. Recent Projections of 2010 South Korea's Economic Growth: -- Ministry of Strategy and Finance 5.0 percent �00A;-- Korea Development Institute 5.5 percent -- Bank of Korea 4.6 percent -- IMF 4.5 percent -- OECD 4.4 percent -- Samsung Economic Research 4.3 percent -- LG Economic Research 4.6 percent -- SC First Bank 4.8 percent ¶4. (SBU) ROKG Plans to Expand Stake in IMF and World Bank: In an effort to increase the value of Korea's "brand," the Presidential Council on Nation Branding on December 11 announced it would increase Korea's stake in the IMF and the World Bank to a level equivalent to the ROK's GDP-to-global economy ratio. This ratio is currently 1.95 percent for Korea, while its stakes in the IMF and World Bank are only 1.34 percent and 1.01 percent, respectively. ¶5. (SBU) ROKG Plans "Business Summit" for G20: At a breakfast meeting with members of the ruling Grand National Party, President Lee Myung-bak said that over 400 of the world's major companies will be invited to the G20 summit in Seoul next year. Lee explained that the Seoul Summit would include corporate events because it will be the first regular meeting of the G20 after the global economy enters the recovery phase. Although few details are available, we understand planning for IT and other industry-specific meetings is SEOUL 00002006 002 OF 003 also underway. ¶6. (SBU) Labor Productivity Below OECD Average: According to the Ministry of Knowledge Economy (MKE) and the Korea Productivity Center on December 3, Korea's labor productivity (added-value per employee)was USD 57,204 in 2008, ranking 22nd among the 30 OECD member countries. This was an advance from 23rd in 2003 but still lower than other industrialized countries. In particular, labor productivity in the services sector totaled USD 33,233, which represented a mere 44.8 percent of productivity in the U.S. and 59.9 percent of productivity in Japan. ¶7. (SBU) Consumer and Business Sentiment Down: The BOK announced on November 25 that the consumer sentiment index for November fell to 113, down four points from October. After rising eight consecutive months, the index's six sub-indices all edged downward, but remained above the benchmark of 100. Likewise, the BOK said that its Business Survey Index (BSI) of manufacturing business conditions for November stood at 89, down three points from October. The BSI had dipped to as low as 43 in February but rose to 92 in October, the highest level in six years. ¶8. (SBU) South Korea Joins OECD Development Committee: On November 25, the OECD's Development Assistance Committee (DAC) by unanimous consent admitted Korea as its 24th member. Korea, as the first country to transform itself from a DAC beneficiary into a DAC benefactor, is dramatically raising the profile of its development programs. The ROKG has committed to tripling Official Development Assistance spending to 0.25 percent of its Gross National Income by 2015, and plans to host the 2011 High-Level Forum on Aid Effectiveness. ¶9. (SBU) Central Bank to Adopt Broader Inflation Target in 2010: The BOK announced that its 2010-12 inflation target will be three percent with a tolerance range of plus or minus one percent, which is twice the current range. The increased range reflects concern that increasing international oil prices and a weakening won could increase the possibility of greater inflation volatility. ¶10. (SBU) Double-Digit Export Growth Buoys MKE Plans for Trade: MKE stated on December 1 that exports amounted to USD 34.27 billion in November, up 18.8 percent from a year earlier, marking the first month of year-on-year export growth since October 2008. Imports also increased, totaling USD 30.22 billion, up 4.7 percent from November 2008. Accordingly, the November trade surplus reached USD 4.05 billion, surpassing the surplus of USD 3.63 billion recorded in October. Meanwhile, the MKE announced plans to make Korea one of the world's eight major exporters by reaching USD 1.3 trillion in trade volume and USD 650 billion in exports by 2014. This goal would require Korea to increase exports by an annual average of 12.5 percent over the next five years. To this end, the government will proceed to create trade infrastructure including financial system improvements related to exports. In 2010, exports and imports are expected to rise 13 percent and 21 percent, respectively, from 2009 to USD 410 billion and USD 390 billion, resulting in a trade surplus of about USD 20 billion. ¶11. (SBU) Job Market Falls for First Time in Four Months: The Korean economy lost 10,000 jobs in November, with many businesses remaining reluctant to hire new workers amid the continued uncertain global economic outlook. Despite improving overall macroeconomic conditions, the job market here has remained sluggish throughout the year. The government's hiring of temporary workers in various sectors sustained the labor market but those effects have diminished in recent months. According to a report of the National Statistical Office on December 16, the number of employed stood at 23.8 million last month, down 10,000 from a month earlier, marking the first decline in four months. The number of unemployed was 819,000 in November, up 69,000 from the previous year, with the seasonally adjusted jobless rate rising to 3.5 percent from 3.4 percent. Finance and Structural Policies -------------- ¶12. (SBU) Central Bank Maintains Key Rate at Two Percent: On December 10, the BOK Monetary Policy Committee announced it would keep the benchmark interest rate at 2.0 percent, maintaining a record-low rate for ten straight months. The BOK stated in its SEOUL 00002006 003 OF 003 current economic development report that real economic activity continues to recover. However, growth in facilities investment slowed, and the amount of completed construction work declined. The central bank added that the economy will maintain positive quarter-on-quarter growth amid lingering uncertainties. ¶13. (SBU) ROKG to Propose Regulation of Global Capital Flow: A senior finance ministry official said on December 17 that Korea would propose at the G20 a mechanism to curb international capital movements, particularly "hot'' money, to ease the side effects of cross border money flow on emerging economies. Deputy Strategy and Finance Minister Shin Je-yoon said the short-term speculative money movements across the globe are wreaking havoc on many countries, particularly ones that heavily rely on trade and other international transactions. The ROKG, he continued, would put forward separate agendas for the developed, emerging and developing countries: the strengthening of financial market regulations for advanced countries, cross border capital movement regulation for emerging economies, and development financing for developing countries. ¶14. (SBU) Samsung Opens Micro-Credit Bank: Samsung Group, the nation's top business conglomerate, opened a microcredit bank on December 15 that will lend money to low-income earners at relatively low interest rates. The group launched the bank in Suwon, Gyeonggi Province, where its affiliates, such as Samsung Electronics, are headquartered. The Bank will handle 300 billion won (USD 254 million) in funds over the next 10 years financed by affiliates of the group. The microcredit concept has been promoted by the Financial Services Commission (FSC) in the aftermath of the worldwide economic turmoil. Besides Samsung, other major chaebols, such as Hyundai Automotive and LG groups as well as commercial lenders such as Kookmin Bank, are looking to follow suit and set up loan opportunities for those in need. The FSC aims to encourage local conglomerates and lenders to establish more than 20 branches by next May with an eventual goal of increasing the tally to hundreds in the near future. The overall amount of the fund is expected to reach 2 trillion won (USD 1.7 billion) over the next 10 years and approximately 200,000 people who would otherwise struggle to obtain loans from banks due to low credit ratings are likely to benefit. STEPHENS