Mar by chenboying


									Mar. 29, 2000 Ministry of Finance and Economy Foreign Press and Public Relations Division

< Highlights >

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Korea's GDP Increased by 10.7 Percent in 1999 March Inflation Rate Remains Stable Industrial Output Maintains High Rise in February FDI in March More Than Doubled from a Year Earlier Short-term External Liabilities as of End-January Brief Notes on Recent Economic Issues 1. 2. 3. 4. Government Debt Burden Foreign Direct Investment Income Disparity Government Involvement in Economic Affairs

Korea's GDP Increased by 10.7 Percent in 1999

Korea's real gross domestic product (GDP) recorded a 10.7 percent year-on-year increase in 1999, mainly due to rising exports and strong domestic demand, signaling the economy's full recovery from the severe recession following the financial crisis.

By industry, manufacturing increased most rapidly - by 21.8 percent - followed by services with 11.7 percent. But construction decreased by 10.1 percent, mainly due to the sluggish supply for both housing and offices. By expenditure, domestic consumption increased by 10.3 percent and fixed capital formation by 4.1 percent. Exports increased by 16.3 percent, bolstered by brisk shipments of semiconductors, computers and communication equipment.

Nominal GDP increased by 8.9 percent to 483.8 trillion won. On the basis of US dollars, it increased by 28.0 percent to US$ 4,067 billion due to the domestic currency's rapid and steep appreciation against the US dollar. Per capita GDP increased to US$ 8,581, a US$ 1,839 increase from the US$ 6,742 in 1998. On a worldwide basis, Korea's nominal GDP ranked 13th in 1999 - compared to 15th in 1998 - and Korea's per capita GDP placed 37th in 1999 compared to 39th in 1998.

The gross domestic saving rate recorded 33.7 percent, a slight decrease of 0.3 percentage points from the 34 percent recorded in 1998. The gross domestic investment ratio increased rapidly to 27.0 percent from 21.3 percent in 1998, mainly due to the increase of both facility and inventory investments.

The GDP deflator decreased by 1.6 percent due to the price decreases of both manufactured and export goods resulting from the won's appreciation.
Principal National Account Indicators

(Unit: %)

1997 1. National Income (Nominal Term) (Trillion Won) GDP (US$ Billion) (Thous. Won) Per Capita GNI (US$) GDP Deflator Increase Rate 2. GDP Growth Rate (Real Term) 3. Growth Rate by Type of Economic Activity Agriculture, Forestry, and Fishery Manufacturing Construction 4. Growth Rate by Type of Expenditure Final Consumption Expenditure Gross Fixed Capital Information Exports Imports 5. Expenditure Structure Gross Saving Ratio Gross Domestic Investment Ratio 33.4 34.4 3.2 -2.2 21.4 3.2 4.6 6.6 5.4 10,307 3.2 5.0 4,766 9,803 453.3



444.4 3,177 9,431 6,742 5.0 -6.7

483.8 4,067 10,206 8,581 -1.6 10.7

-6.6 -7.4 -8.6

4.7 21.8 -10.1

-9.8 -21.2 13.2 -22.4

8.5 4.1 16.3 28.9

34.0 21.3

33.7 27.0

March Inflation Rate Remains Stable

The consumer price index (CPI) in March rose by 1.6 percent from a year earlier. Public service charges including school fees increased by 3.9 percent, and manufactured product

prices increased by 1.8 percent. Rental fees decreased by 2.3 percent. The year-to-date CPI increased by 1.5 percent, recording a level lower than the nation's annual inflation target of 3 percent. Meanwhile, the producer price index (PPI) in March increased by 2.4 percent, mainly due to the steep price increases of petroleum-related products approximating 28.2 percent.
March CPI and PPI Trends (% change)

1998 CPI PPI 9.0 15.1

1999 0.5 -4.3

2000 1.6 2.4

Industrial Output Maintains High Rise in February

Strong export performance of semiconductors and office equipment as well as strong domestic consumption pushed industrial output up in February by 25.4 percent from a year earlier, according to the National Statistical Office. However, the average operating ratio in the manufacturing sector, which had remained at the 80 percent level from November 1999 to January 2000, edged down to 78.9 percent as the output of cars and ships decreased in February.

Other real economic indicators, related with consumption and facility investment, showed upward trends in February. Wholesale and retail sales perked up 13.3 percent from a year earlier. Increased investment into computers, telecommunications equipment, and industrial machines raised facility investment by 66.0 percent from the same month of last year.

Domestic machinery orders received, a key barometer of corporate facility investment, grew by 19.8 percent in February year-on-year. Domestic construction orders, another leading indicator of investment, also rose 74.5 percent.

Meanwhile, the coincident composite index, a measure of current economic conditions, recorded a 0.1 percentage-point month-to-month decrease in February. The leading composite index, which forecasts economic performance in the future, also dropped by 2.3 percentage points from a year earlier.
Industrial Activity Trends (Units: Year-on-Year, %)

1999 Feb Industrial Production Shipment Inventories Average Operating Ratio Wholesale and Retail Sales Domestic Machinery Orders Received Domestic Construction Orders Received -52.0 0.8 13.4 18.0 -1.4 22.6 22.6 13.8 5.1 6.9 -17.3 69.2 Yearly 24.2 25.1 2.1 76.6 3rd Q 28.5 28.8 -8.4 79.6 4th Q 28.9 31.0 2.1 79.8 Jan

2000 Feb 25.4 28.3 8.6 78.9

28.0 29.9 5.9 80.5











FDI in February More Than Doubled from a Year Earlier

February's foreign direct investment (FDI) more than doubled from a year earlier, recording US$ 627 million. During the same timeframe, the number of FDI cases also rose by 110.2 percent, recording 248. Given that the number of working days in February was fewer than other months because of the nation's traditional folk holidays, the US$ 627 million figure is remarkable.

By scale, small-and mid-sized FDI cases with less than US$ 10 million accounted for 96.4 percent of the total number of FDI cases. This suggests that the government's efforts to diversify the types of FDI are paying off.

FDI from the United States recorded the highest amount at US$ 201 million in February, followed by EU nations with US$ 114 million and Japan with US$ 17 million. FDI from US and EU countries increased by 48.9 and 74.6 percent, respectively, compared to the same month of last year.

By industry, FDI into the manufacturing sector soared by 119.7 percent in February to US$ 145 million, up 119.7 percent from a year earlier. FDI into the service sector also ballooned by 100.8 percent to US$ 482 million.
FDI Trends

1998 Feb Amount (US$ Mil.) Case 199 87 Jan-Feb 329 173 Feb 310 118

1999 Jan-Feb 1,277 250 Feb 627 248

2000 Jan-Feb 1,747 552

Short-term External Liabilities as of End-January

As of the end of January, Korea's short-term external liabilities marked US$ 39.9 billion, accounting for 29.2 percent of the total external liabilities of US$ 136.8 billion. The January figure is up US$ 9.2 billion over a year earlier and up US$ 1.7 billion from the end of 1999.

The brisk export and import performance was the key reason for the recent slight rise in the short-term external liabilities. In order to meet increasing demands at home and abroad, the nation's exporters and importers had to borrow more short-term funds from abroad.

The government firmly believes that the recent rise in short-term external liabilities is not posing a serious threat to the nation's economy as the recent rise was not caused by the reckless borrowing in the financial sector, one of the key reasons for the 1997 financial crisis. Additionally, compared to pre-crisis times, the nation's ability to pay back its external liabilities has much improved, as is evidenced by the decrease in the nation's total amount of external liabilities and the surge in its usable foreign exchange reserves.

The nation's total external liabilities have maintained a downward trend, after peaking at US$ 180.7 billion at the end of June 1997. The usable foreign exchange reserves recorded US$ 81.2 billion as of March 15.

Brief Notes on Recent Economic Issues

The recent weeks have seen an active public debate on some key economic issues in Korea¡¯s local media. These issues include: the level of government debt; the role of foreign investment; the problem of income disparity; and so-called government intervention in economic affairs. This brief note has been prepared to provide accurate background information with the aim of clarifying politically sensitive issues. 1. The government debt burden: it is not only sustainable, but also has already begun to ease.

Some domestic critics have contended that the nation's public debt, comprising both central and provincial government debts, amounts to as much as 400 trillion won, compared to the government's official statistics of 108 trillion won.

The fact of the matter is that the government¡¯s official figure is indeed correct and conforms to the international standards. The nation's official record is in line with the internationally accepted standards of the IMF and the OECD, and shows that Korea's total public debt as of the end of last year was 108 trillion won. In fact, Korea's overall debt management system, including the data compilation process, has been significantly upgraded with the help of the IMF and the World Bank in the wake of the recent financial crisis.

Korea's Government Debt (Unit: Trillion Won)

End-97 Central Government Provincial Government Total (% of GDP) 50.5 15.1 65.6 (14.5)

End-98 71.4 16.2 87.6 (19.5)

End-99 90.1 18.1 108.1 (22.3)

2. The alleged 400 trillion won level of the government debt includes contingent liabilities, such as guarantees and unspecified pension liabilities that might accrue over the next decades. Since the IMF and OECD standards define government debt as only liabilities that are direct obligations on the government, the accurate figure should be 108 trillion won. It must also be noted that Korea fully recognizes the importance of contingent liabilities, estimated at 90 trillion won, and thus records them in a memorandum item. This follows the international norm. At present, it is highly unlikely that any of the contingent liabilities will add to the government¡¯s actual debt obligation in the foreseeable future.

The level of Korea¡¯s government debt compares favorably with other OECD countries. Korea's debt relative to GDP, estimated at 22.3 percent, is certainly manageable and in fact is much lower than the OECD country average of about 70 percent. Moreover, the Korean government has more assets than liabilities, making it one of only three OECD countries whose net asset position is positive. It is also worth noting that the amount of Korea's public debt that needs to be retired through tax revenues is only 60 trillion won, since the remainder includes pass-through obligations or bond issues of which service payment is largely ensured.
Government Debt-to-GDP Ratio - OECD Member Countries (Unit: %)

Korea 22.3

Japan 97.3

France 66.5

Germany 63.1

United States 56.7

Average 69.5

Source: OECD Economic Outlook, June 1999

3. The restoration of fiscal balance is in sight. Despite the fact that Korea¡¯s government debt burden is not heavy, the government remains vigilant about reducing it much further and faster. This will restore Korea¡¯s long tradition of fiscal soundness over the medium term.

Korea's fiscal deficit to GDP ratio was 2.9 percent last year, a considerable improvement over the originally envisaged target of 5 percent, and is expected to further decline to 2.5 percent by the end of this year. The government aims to restore a fiscal balance gradually by the year 2003, making it possible to reduce the nation's public debt from 2004. This constitutes pushing ahead schedule for the fiscal balance by three years. The government is also working hard to recover most, if not all, of the 64 trillion won of government guarantees that have been extended for financial restructuring. 4. Foreign direct investment: it is a channel for wealth creation, not wealth diversion.

Some recent political rhetoric argues that Korea¡¯s market opening and investment liberalization policy has triggered a transfer of national wealth to foreigners. Such a view could unfortunately raise public sentiment against foreign investment.

The anti-liberalization sentiment represents an erroneous position that is reminiscent, unfortunately, of the old days. By and large, the government is convinced that foreign capital flows -- especially FDI -- are contributing to the Korean economy through the provision of productive financial resources, the creation of value-added job opportunities, the transfer of technology and management know-how, and the expansion of export markets via new strategic alliances. As such, the Korean government is abiding fully by its liberalization policy to proactively meet the challenges of the globalization era.

Korea's financial markets are now fully open for foreign investment. As of May 1998, the ceiling on foreign stock ownership was abolished. In November 1998, the Foreign Investment Promotion Act was passed bringing generous tax benefits to foreign investors in the high-tech and service sectors. Moreover, the new Foreign Exchange Transaction Act, replacing the old Foreign Exchange

Management Act, went into effect in April 1999. This Act will completely liberalize capital movements by the end of 2000. As a result of these efforts, the nation's foreign direct investment reached a record high of US$ 15.5 billion in 1999.
Yearly Trends of Foreign Direct and Portfolio Investment

1997 Direct (US$ Bil) 1) Portfolio (US$Bil) 2) 7.0 1.0

1998 8.9 4.7

1999 15.5 5.2

Note: 1) based on commitment; 2) based on net flows

5. Active foreign investment is set to help improve the financial structure of Korean corporations. Korea's business expansion in the past was largely supported by external debt financing, which was one of the contributing factors for the recent financial crisis. To help remedy this deep-rooted structural deficiency, President Kim's new government set a high priority in opening the nation's economy, particularly the liberalization of the capital market and the promotion of foreign direct investment.

Fruits of foreign investment are shared equitably between domestic and foreign investors. Indeed, active foreign capital inflows have helped to facilitate structural reforms, revitalize local capital markets, and quickly replenish Korea's external reserves. It is hard to deny that foreign investors did well from the rising stock prices, but to be fair, domestic investors have gained more as they account for some 80 percent of the capital market capitalization.

It is high time to strengthen efforts to attract FDI, not retreat from the liberalization policy. The fact of the matter is that Korea still remains way behind other countries in terms of FDI inflows. For example, the FDI to GDP ratio stood at 7.8 percent in 1999, which is considerably lower than other major emerging market economies, such as China and Malaysia -- not to mention advanced countries. In this context, it is good news to Korea that President Kim's recent visit to Europe proved very successful in bringing in a large amount of new direct investment commitments.

It should be stressed again that the ultimate goal of Korea¡¯s economic

management is to make it the best place to conduct business in the world. The Korean government remains firm on its plan to privatize state-owned enterprises, although implementation retains some flexibility, given due consideration to the market situation. 6. Income disparity: it has widened during the economic crisis, but is on the mend with the ¡°productive welfare¡± system.

Another issue that has drawn much local media attention lately is income disparity, which reflects the observation that the income gap between the rich and the poor has widened in the past two years.

This is unfortunate, although it is hardly a unique problem for a country that has gone through a severe economic crisis. President Kim's top priority is to address the problems stemming from the widened income gap. The government well understands that all the reforms it has made thus far will ring hollow if the lives of ordinary people are not enriched. In this context, Korea¡¯s social safety net has been strengthened to provide adequate protection to those who lost their jobs in the drastic reform process. Unemployment insurance has been expanded, and financial assistance to low- and middle-income families increased.

The problem of income disparity has turned the corner for steady -- albeit slow -progress. Even though the widened income gap is still a serious challenge, the nation is beginning to see an improvement as the government's "productive welfare" policies bear fruit. The unemployment rate is falling apace, declining to 5.3 percent this February after peaking at 8.6 percent a year earlier. The number of new start-ups has also ballooned, reaching the 30,000 level in 1999, a rate that far surpasses the pace of the past years, thanks to the government program to promote small- and medium-enterprises and venture businesses.

Moreover, the Gini coefficient, which indicates the degree of inequality in income distribution, began to fall from the second quarter of 1999. (The coefficient ranges from 0, absolute equality, to one, absolute inequality.)
Gini Coefficient Trends





1st H 0.291 0.283 0.316 0.322

2nd H 0.319

3rd H 0.320

7. The government is set to meet the challenge of the ¡°digital divide.¡± In addition to actively working to rectify the problem of social and economic imbalances that have come about as a result of the financial crisis, the Korean government is striving to narrow the "digital divide" as the nation is facing the informationtechnology (IT) and Internet revolution. The knowledge gap is expected to become an important source of social and economic imbalances in the new digital economy.

By emphasizing the social dimension of economic development, Korea will be able to strengthen the middle class, who will lead the market-based economic growth. The structure of Korea's income distribution will improve further to the high range of OECD standards in 2 to 3 years. Korea's economic development strategy is geared to a paradigm that is conducive to sustainable and equitable growth in the future. 8. Government involvement in economic affairs: it is intended only to facilitate market-driven and self-reinforcing reforms.

The last issue that has drawn recent public attention is what has been referred to as government intervention in economic and financial affairs. Since the breakout of the financial crisis, the government has led sweeping reforms to eliminate the possibility of a recurring economic crisis. It may be shameful to see this accusation emerging because it is precisely this distortion -- i.e., the collusive ties between government and business of the past -- in our economy that our reform programs have been devoted to correcting in the past two years.

The government¡¯s catalytic role has been indispensable to correct market failure and to instill market principles. It is important to note that Korea¡¯s reforms have always been conducted under the principles of democratic laws and institutions. In other words, "transparency" and ¡°accountability¡± have been key words of the Korean reform efforts. This involves an effective utilization of market mechanisms to resolve deeply embedded structural problems. It has not been an easy task, however, as in some areas, a well-functioning market in Korea did not exist. In

this regard, the government has faced a dual challenge of not only enforcing fair rules of the game, but also instituting the actual rules themselves.

In the corporate sector, the creditor banks, not the government, have been spearheading reforms. In early 1998, the banks upgraded voting rights for minority shareholders, mandated the compulsory appointment of outside directors, and reached agreements with the chaebols on international accounting standards. Even all the procedures pertaining to the liquidation of the troubled companies are being made public. Restructuring programs have been implemented under the terms outlined in MOUs between commercial creditors and companies concerned.

Some banks have been quasi-nationalized, but their autonomous management has been respected. In the process of drastic financial reform, the government had to inject a large amount of funds to shore up the capital adequacy position of weak banks, making some of them quasi-nationalized. Nevertheless, the government respects fully the independent personnel and lending decisions, as well as the autonomous management of the concerned financial institutions. The government plans to privatize the temporarily nationalized banks as soon as the circumstances warrant.

The government has also been strengthening prudential regulation and supervision for improved soundness in the financial sector, which hardly accords with the charge of government intrusion.

The government is encouraging creditor banks not to lose their steam in implementing corporate sector reforms. This is the government fulfilling its function of financial supervision in the most genuine sense, nothing more. If creditor banks drag their feet in reforming troubled firms, this may ultimately undermine the nation¡¯s economic recovery and reform efforts.

Notable Quotes


Reuters (Mar. 23, 2000 "Growth Tops 10pc as Exports Recover")

(Regarding February's unemployment rate) This is the first time since we started

keeping records that the February level has fallen from the previous month. We see employment sharply rising in the agricultural, fisheries and forestry sector in line with the economic recovery, while the booming information technology industry also made a big contribution," said Lee Jeong-taik, a spokesperson at Korea's Ministry of Labor. 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

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