Dec. 9, 1999 Ministry of Finance and Economy Foreign Press and Public Relations Division T:82-2-503-9245
KOREA ECONOMIC UPDATE
< Highlights >
Korea Sees Double-Digit GDP Growth in the 3rd Quarter Korea's GDP is Expected to Expand 8-to-9% in 1999 President Kim Vows to Double Per Capita GDP by 2003 Industrial Production Grows by 30.6% in October Unemployment Rate Drops to 4.6% in October Usable Forex Reserves Hit Record US$ 70 Billion Current Account Keeps Surplus Dishonored Bill Ratio Sharply Declines in October No Serious Y2K Problems Expected in Financial Sector
Korea Sees Double-Digit GDP Growth 3rd Quarter
Korea's real gross domestic product (GDP) increased by 12.3 percent year-on-year during the 3rd quarter, according to the Bank of Korea. This growth is largely attributable to fast recovery in facility investment and rapid expansion of exports.
On the supply side, the manufacturing industry grew by 26.8 percent year-on-year. On the other hand, construction still remains sluggish, recording a 10.0 percent decrease from the same period of last year.
On the demand side, commodity exports increased by 25.3 percent, boosted by brisk overseas shipments of semiconductors, personal computers, automobiles and communications equipment. Gross fixed capital formation kept increasing, recording 6.9 percent, due to the continuous decrease of construction investment. Nevertheless, facility
investment increased by 48.0 percent.
This higher-than-expected growth is fueling the debate pertaining to economic overheating. However, the seasonally adjusted GDP growth rate in the 3rd quarter recorded three percent, lower than the 3.9 percent in the 2nd quarter. This shows that the concern about inflation doesn't deserve much attention yet.
GDP Growth Trends (Unit: Year-on-Year, %)
1998 1st Q GDP Consumption Expenditure Fixed Capital Formation Exports -3.6 -8.4 2nd Q -7.2 --9.7 3rd Q -7.1 -8.9 4th Q -5.3 -9.0
1999 Yearly 1st Q 2nd Q 3rd Q -5.8 -8.2 -21.1 13.3 4.6 5.0 -4.3 10.3 9.8 7.3 4.9 15.1 12.3 8.4 6.9 22.2
-20.6 -23.7 -22.2 -22.2 25.7 13.2 8.0 15.1
Korea' GDP to Expand 8-9% in 1999
The nation's GDP is expected to expand approximately eight-to-nine percent this year after a 5.8 percent contraction last year, with average inflation remaining at less than one percent, according to a recent agreement between the government and the International Monetary Fund (IMF). The current account surplus is projected to be around six percent of GDP.
For 2000, the government and the IMF project that the nation will grow in the range of five-to-six percent, and inflation is expected to pick up slightly but should be contained at around three percent. The current account balance will continue to narrow but should remain in surplus.
In regard to monetary and exchange rate policy, both parties expect that the present low interest rate policy will be maintained for the time being, and the exchange rate policy will remain flexible. However, monetary policy may need to be adjusted to address possible inflationary pressure as the degree of slack in the economy is reduced.
In light of the faster-than-expected economic recovery in 1999, the timetable for the government's medium-term fiscal objectives of a balanced fiscal position will advance to 2004 from the earlier forecast of 2006. The deficit target for 1999 is around four percent of GDP.
President Kim Pledges to Double Korea's Per Capita GDP by 2003
"With projected annual growth of six percent in the years to come, Korea's per capita income is to increase from US$ 6,800 last year and regain the US$ 10,000 level in the year 2000. In 2003, it will have further jumped to US$ 13,000," said President Kim Daejung at the opening of an International Conference on Economic Crisis and Restructuring in Korea held in downtown Seoul on December 3, 1999. President Kim also said that the unemployment rate will come down to the three-percent level, as two million new jobs are created over the next four years with the economic expansion.
"With sustained export competitiveness and surplus in the balance of payments, Korea will become one of the few net creditor countries of the world," President Kim added.
Industrial Production Jumps 30.6% as Exports and Consumption Strongly Rise
Helped by the brisk exports of semiconductors and computers as well as strong domestic consumption, industrial production in October soared 30.6 percent from a year earlier, according to the National Statistical Office. This was the second highest year-on-year monthly increase in 1999. The high rate of industrial production growth in October also reflected a rebound from last year's low level of production caused by the Chusok holidays.
With the increase in industrial production, the average operating ratio in the
manufacturing sector maintained a high rate of 78.6 percent, up 18.0 percentage points from a year ago.
Other real economic indicators, related with consumption and facility investment, also maintained a sustainable growth rate. Wholesale and retail sales, which reflect consumption trends, grew by 15.7 percent in October from a year earlier. Also due to increased investment in such sectors as telecommunications, information and logistics, facility investments tallied a 51.2 percent increase from the same month of last year.
Domestic machinery orders received, a key barometer of corporate facility investment, was up 24.2 percent in October year-on-year. Domestic construction orders, another leading indicator of investment, also rose 33.9 percent.
Meanwhile, the coincident composite index, a measure of current economic conditions, recorded a relatively low month-to-month increase rate in October, rising only 0.1 percentage points from September. The leading composite index, which forecasts economic performance in the future, also grew by only 0.9 percentage points from a year earlier.
Industrial Activity Trends (Units: Year-on-Year, %)
'98 Oct Industrial Production Shipments Inventories Average Operation Ratio Wholesale and Retail Sales Domestic Machinery Orders Received Domestic Construction Orders -9.3 -9.1 -14.7 69.1 -13.2 -25.4 -52.2 Yearly -7.3 -7.1 -17.3 68.1 -12.7 -30.5 -42.5 1st H 17.6 19.3 -16.7 74.1 8.5 27.8 -13.5
'99 3rd Q 26.8 27.7 -9.8 79.5 16.8 22.1 13.4 Sept 18.3 19.9 -9.8 79.0 13.9 9.2 36.5 Oct 30.6 33.2 -5.7 78.6 15.7 24.2 33.9
Economic Recovery Drives Jobless Rate to Drop Eight Straight Months
The unemployment rate in October fell for the eighth consecutive month recording 4.6 percent, a 2.5 percentage point decrease from the same month of last year, according to the National Statistical Office. After hitting a record 8.6 percent in February, the unemployment rate has shown a strong downward trend, registering 8.0 percent in March, 6.2 percent in June and 4.8 percent in September.
The number of unemployed also maintained its strong downward trend in October posting 1.02 million compared with 1.07 million in September.
Compared to the same month of last year, the number of employed workers increased in almost every sector. The number of daily or temporary workers increased around 882 thousand from the same month of last year. On the other hand, the number of regular workers on contracts of more than a year decreased slightly from a year-earlier.
This shows that job security worsened despite a fall in the unemployment rate. But the implications are not all bad as this decrease also indicates a step toward improved labor flexibility.
No. of Jobless(thous.) Jobless Rate(%) Labor Participation Rate(%)
'99 Aug 1,241 5.7 60.8 Sept 1,069 4.8 61.6 Oct 1,021 4.6 61.8
1,537 7.1 61.4
Usable Foreign Reserves Hit Record US$ 70 Billion
The nation's usable foreign exchange reserves, which recorded only US$ 3.9 billion at the onset of the economic crisis in late 1997, surpassed a record of US$ 70 billion as of December 3. The remarkable build-up of foreign reserves was attributable to the sustainable current account surplus and increased inflow of foreign direct investment. Domestic banks' repayment of foreign currencies to the central bank also contributed to the rise.
The US$ 70 billion-level usable foreign exchange reserves mean that the nation has fully recovered from the foreign exchange liquidity crisis. In addition, the high level of reserves will enable the country to increase its external transactions and to more effectively cope with adverse effects of cross-border capital flows.
Usable Foreign Exchange Reserves (Unit: US$ bil) '99 End-97 End-98 Mar 8.8 48.5 54.5 Jun 60.4 Oct 66.2 Dec. 3 70.1
Current Account Keeps Surplus
The current account balance of payments in October recorded a US$ 2.1 billion surplus, a US$ 0.7 billion decrease from the same month of the last year. In addition, the year-todate current account surplus registered US$ 21.3 billion.
Mainly due to increases in capital goods imports from Japan and oil imports from Arabic countries, the goods account surplus shrank to US$ 2.7 billion from US$ 3.2 billion a year earlier. The service account, which includes transportation fees, travelers' spending and consulting fees, plunged almost to zero in October, compared to a US$ 160 million surplus
a year earlier. At the heart of this fall of the service account was the rise in the number of Koreans travelling overseas for studying and training as well as an increase in the transportation fees following the increase in exports. The capital account in October recorded a US$ 654 million deficit from US$ 658 million in the same month of last year. The total amount remained almost unchanged, but the components were totally changed. Foreign portfolio investment increased to a US$ 949 million surplus from a US$ 336 million deficit in October 1998. The repayment of foreign currency loans by the domestic banks increased rapidly to US$ 1.2 billion from US$ 221 million a year earlier.
Current and Capital Account Trends (Unit: US$ bil) '98 Oct Current Account Goods Account Service Account Capital Account 2.8 3.2 0.2 -0.7 Jan-Oct 34.6 35.0 0.8 -3.0 Sept 2.4 2.6 -0.1 -2.5 '99 Oct 2.1 2.7 -0.0 -0.7 Jan-Oct 21.3 24.7 -0.9 -4.7
Dishonored Bill Ratio Sharply Declines
According to the Bank of Korea, the dishonored bill ratio - based on the total value of bills cleared - fell rapidly to 0.57 percent from 1.12 percent in September, due to the sharp decrease in Daewoo-related dishonored CPs and bonds.
As for the number of bankruptcies, 565 companies went bankrupt in October, an increase of 89 from the 476 in September. This number, however, is far below the monthly average of 599 in the first half of this year.
The number of start-up companies to the number of bankrupt companies maintained a high level of 12.8. Start-up companies in seven major cities jumped to their highest number recorded since March 1993, when this survey first started.
Dishonored Bill Ratio Trends '99 '98 1st Q Dishonored Bill Ratio(%) No. of Bankrupt Firms No. of Start-ups / No. of Bankrupt Firms 0.38 22,828 2.6 0.11 1,932 10.1 2nd Q 0.12 1,662 12.0 Oct 0.57 565 12.8
No Serious Y2K Problems Expected in Financial Sector
Domestic financial institutions have almost resolved their year 2000 computer problems, according to a recent survey conducted by the Ministry of Information and Technology (MIT). In addition, sectors such as electricity and energy, transportation, communications, and defense have solved one hundred percent of their Y2K problems.
In the financial sector, the survey , which was conducted among 1,838 financial institutions, including banks, securities firms, and insurance companies, revealed that financial institutions have implemented 99.9 percent of their Y2K solutions. Given that the remaining glitches are related to word processing, no serious Y2K problems are expected next year.
Meanwhile, the progress rate of Y2K solutions in the central government averaged 99.9 percent, while all of the local governments have completed their Y2K preparations. Despite this high progress rate, the government will not become complacent and is preparing to cope with any last minute, unexpected glitches.
Asian Wall Street Journal ("Seoul Considers Buying Loans Made to Daewoo")( Dec. 3, 1999)
"I expect Korea's economy to grow 9%-10% in 1999, but that growth will slow
next year to 5%-6%. Despite the recent, rapid growth, I do not expect strong inflationary pressures. Inflation this year will fall below 1%, while next year, it could reach 3%. The Korean currency, the won, may continue to strengthen, although its movements will depend in part on those of the Japanese yen, which has also been strengthening recently. I expect foreign direct investment in Korea to reach $12 billion to $13 billion in 1999, which would be the highest annual total ever. I think it will continue to expand," said Korea's Finance Minister Kang Bongkyun in an interview with the Asian Wall Street Journal.
South China Morning Post ("Minister Labors Hard to Win Over Korean Workers") ( Dec. 3, 1999)
"A total shift in perspective among workers, businesses and the government is needed in order to compete in the new economy. Korea must embrace a new paradigm where workers and employees are partners in every sense of the word," said Korea's Labor Minister Lee Sang-ryong in an interview with the South China Morning Post. If you have any questions, suggestions, and/or comments, please feel free to call the Foreign Press and Public Relations Division at (82-2) 503-9245, fax (82-2) 503-8653, or e-mail us at firstname.lastname@example.org.