SEOUL ECONOMIC BRIEFING -- FEBRUARY 2009

UNCLAS SECTION 01 OF 03 SEOUL 000314 SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ENRG ETRD EINV KS SUBJECT: SEOUL ECONOMIC BRIEFING -- FEBRUARY 2009 -------------- In This Issue -------------- Domestic Economy -------------- Korea,s 2008 Current Account Posts USD 6.41 Billion Deficit Business Survey Reveals Expectations for Continued Economic Recession Unemployment Rate Began to Rise in December 2008 Finance and Structural Policies -------------- Restructuring Underway for the Construction and Shipbuilding Sectors FSC's Annual Plan for Deepening Financial Deregulation Controversy over Government Control of Seoul Bourse Banks' Delinquency Ratios Rising but Still Stable with High Loan Loss Provisions BOK Eases Lending Rules on Collateral Collapse of KDB-Hanwha Deal for Sale of Daewoo Shipbuilding Domestic Economy -------------- ¶1. (U) Korea,s 2008 Current Account Posts USD 6.41 Billion Deficit: South Korea,s 2008 current account shifted to a deficit of USD 6.41 billion from 2007,s surplus of USD 5.88 billion dollars. The goods account surplus decreased to USD 5.99 billion from the previous year's 28.17 billion dollars, due to the increase in prices of crude oil and other raw materials. The services account deficit declined to USD 16.73 billion from the previous year's USD 19.77 billion, as the travel account deficit narrowed significantly and the transportation account surplus widened. The current account picture shifted dramatically late in the year as oil and commodity prices tumbled. The cumulative current account deficit peaked at USD 13.93 billion in September and then, as oil prices fell, dropped by more than half by the end of the year. Monthly current account surpluses were USD 4.92 billion in September, USD 1.91 billion in November, and USD 0.86 billion in December. Most analysts believe the ROK will a current account surplus in 2009, although the figure for January was a USD 1.36 billion deficit. ¶2. (U) Business Survey Reveals Expectations for Continued Economic Recession: In January 2009, the Bank of Korea,s business survey index (BSI) on business conditions in the manufacturing sector remained at an extremely low level, but moved one point higher than in December. The score of 47 (where anything below 100 indicates negative conditions) reflects continuing sluggish sales but slightly improved profitability. January,s BSI score for the outlook (for February) rose from 44 to 49 in expectation of increased sales and improved profitability. In the non-manufacturing sector, the BSI for January remained at 59, while the outlook BSI (for February) increased from 55 to 59. ¶3. (U) Unemployment Rate Began to Rise in December 2008: The National Statistical Office reported that the ROK,s unemployment rate remained at 3.2 percent in 2008. In December, however, the labor market began to reflect the economic slowdown as unemployment rose 0.2 percent point year-on-year to 3.3 percent and the number of unemployed persons increased by 51,000 to 787,000. This unemployment figure does not reflect the unquantified contraction of the informal labor sector, predominantly composed of foreign workers from countries such as China and the Philippines. Ethnic Korean Chinese workers (known as Yanbianese as they come from the province of Yanbian) have taken a large number of labor jobs at construction sites, factories, restaurants, and in homes in recent years. Tens of thousands of Yanbianese, however, have reportedly been departing for China in recent months as the Korean labor market declines and the weak won undermines the attractiveness of employment in SEOUL 00000314 002 OF 003 Korea. We anticipate further increases in the unemployment rate in 2009 despite government and corporate efforts to cut costs without shedding labor. Finance and Structural Policies -------------- ¶4. (U) Restructuring Underway for the Construction and Shipbuilding Sectors: The Korea Federation of Banks, representing the creditor financial institutions, announced in late January the result of the first phase of their credit risk evaluation by reviewing 19 shipbuilding and 92 construction firms. The ROKG urged these evaluations to remove the weakest firms from the market and clear the clogged flow of credit under the current difficult economic conditions. 14 of the 111 companies reviewed were listed as in need of restructuring. The evaluation gave C& Heavy Industries (a shipbuilder) and Daeju Construction the lowest score, moving them into bankruptcy court. The creditors rated the other 12 as troubled, but able to recover with debt restructuring. Creditors and ROKG financial authorities began the second phase of the restructuring in February. They are now evaluating the credit risk of the remaining (smaller) shipbuilding and construction firms. ¶5. (U) FSC's Annual Plan for Deepening Financial Deregulation: On January 22, the Financial Services Commission (FSC) unveiled its annual plan for financial deregulation. This year the themes are: economic recovery, small and medium size enterprise, relief for low income families, and job creation. The FSC identified over 130 necessary actions -- 25 would require amending legislation, 39 would require amended presidential decrees, and 60 or so would require action by the FSC itself. Approximately half are focused on SMEs and most of the remainder are aimed at improving the investment climate. The FSC has pledged to ease new business entry into electronic (including internet and mobile phone) banking and, consistent with the Capital Markets Consolidation Act, to allow financial firms to move into non-core businesses more easily. Additional actions are aimed at reducing the operational burden of small financial companies. ¶6. (U) Controversy over Government Control of Seoul Bourse: The government's decision to put the country's bourse operator under its control is creating controversy. The Finance Ministry announced on January 29 that it had designated the Korea Exchange (KRX) as a public organization following the recommendation of the Board of Audit and Inspection, which ruled that the move was required because the KRX performs a function with a legally mandated monopoly. (This move does not change the private sector ownership of KRX, but subjects it to government oversight). The decision did not end the acrimonious debate over the status of KRX. The executive board of the KRX held a meeting on January 30 and decided to start a long-term legal battle to challenge the decision. The KRX Union's reaction has been far more aggressive and it is considering options including a general strike. KRX and its union claim this measure would harm the corporate value of KRX and eventually affect the global competitiveness of the Korean equity market. Headquartered in Busan, with its Seoul office located at the heart of Yeouido's financial district, KRX has also been a matter of interest for Busan citizens. An alliance of Busan citizens held a press conference, and warned that they will continue to fight until the government cancels the designation. The government has some support within the financial services industry, however, as KRX is seen as abusing its monopolistic market power without any outside force to control them -- particularly with respect to the high wage levels of its employees. KRX is owned by securities companies, but they have long complained that they have almost no control over the firm. ¶7. (U) Banks' Delinquency Ratios Rising but Still Stable with High Loan Loss Provisions: The delinquency ratio for won-denominated bank loans as of end-December, 2008, rose by 0.34 percentage points to 1.08 percent from 2007. The delinquency ratio for corporate loans increased to 1.46 SEOUL 00000314 003 OF 003 percent, up 0.54 percentage points from a year before. The driver for this was the increase in the delinquency ratio of SMEs, which moved from 1 percent to 1.7 percent due to worsening business conditions. More hopefully, the delinquency ratio of large corporations fell 0.03 percentage points to 0.34 percent. The delinquency ratio for household loans stands at 0.60%, up just 0.05 percentage points. Despite the generally increasing loan delinquency rations, the Financial Supervisory Service assessed the asset soundness of domestic banks at favorable levels, noting that the coverage ratio (loan loss provision/standard or below loans) of 175.1 percent was much higher than 88.7 percent figure for U.S. commercial banks. ¶8. (U) BOK Eases Lending Rules on Collateral: The Bank of Korea (BOK) on February 9 eased rules governing BOK lending to local financial institutions to help ease a local credit crunch. The central bank broadened beyond government bonds the range of securities it will accept from banks seeking to borrow funds. As examples of acceptable securities, the BOK cited commercial paper and promissory notes issued by companies that borrowed funds from the commercial bank. ¶9. (U) Collapse of KDB-Hanwha Deal for Sale of Daewoo Shipbuilding: Korea Development Bank (KDB) on January 21 terminated its agreement with Hanwha Group, which had been set to purchase a majority holding in Daewoo Shipbuilding & Marine Engineering (DSME),the world's third largest shipbuilder. The announcement follows three months of wrangling between the two parties over the proposed USD 4.9 billion acquisition. Hanwha was expected to pay for DSME by the end of March, but as the economic downturn became more severe, Korea's ninth-largest conglomerate found the financing of the deal more difficult than expected. In December, Hanwha asked KDB to delay the deal or accept payment in installments. At that point, the bank provided one more month for Hanwha to find the cash for the 50.4% stake, suggesting that the money could be raised from the sale of other Hanwha assets. In its official statement after the collapse of the deal, Hanwha said that it was unable to even start due diligence on DSME due to protests by the shipbuilder's employees over the terms of the deal. Hanwha has paid a $220 million deposit and KDB plans to keep it. A lengthy legal dispute is expected. STEPHENS