Cablegate: South Korea Economic Briefing - November 2008

DE RUEHUL #2293/01 3360652
R 010652Z DEC 08



E.O. 12958: N/A

In This Issue

Domestic Economy
Korea Announces 33 Trillion Won Stimulus Package Year
GDP Growth Slows to 3.9 Percent, Slowest in 3 Years
October Current Account Surplus of USD 4.91 Billion Sets Record
Industrial Output Grows 6.1 Percent in September
Retail Sales Drop and Construction Slows in September
Consumer Sentiment Falls on Economic Gloom
Moody's Keeps 'Stable' Outlook for Korea
Wide Range among Forecasts for 2009 Korean Economic Growth
National Assembly Says Korea's Black Market is Biggest in OECD
"C&Group" Units Move into Debt Workout

Finance and Structural Policies
U.S.-Korea USD 30 Billion Currency Swap Deal
Korea Seeks to Increase Korea-China Currency Swap Line
Additional Liquidity of USD 16 Billion Announced for Corporations
Financial Services Commission to Create USD 7 Billion Fund to Ease
Corporate Bond Squeeze
Bank of Korea Cuts Key Rate to 4 Percent
BOK Loans Set for Small Firms
Overall Loan Default Rate Hits 0.97 Percent; SME Default Rate up to
1.5 Percent
Banks' Short-Term Foreign Debt Growth Fastest in Eight Years
Korea's FX Reserves Dip to USD 212 Billion
USD 100 Billion Guarantee for Bank Borrowing Approved by National
Foreign Investors' Stock Selling Through October Hits Record $30

Inbound FDI Smaller than in 2007
Nation's Global Competitiveness Falls 2 Notches to Thirteenth

Domestic Economy

1. (U) Korea Announces 33 Trillion Won Stimulus Package: On November
3, the South Korean government announced a 33 trillion won
(approximately USD 25 billion) stimulus package (equal to 3.7
percent of 2007 GDP). The package includes 11 trillion won (USD
8.5 billion) in additional fiscal spending to initiate public
infrastructure projects, and three trillion won (USD 2.3 billion) in
tax cuts. Smaller amounts have been allocated to a wide range of
government programs, including financial stabilization measures.
Finance Minister Kang, on announcing the package, said the ROKG goal
was to boost growth above 3 percent and create 200,000 jobs. Kang
also announced the generation of a USD 5 billion current account
surplus as a goal for 2009.

2. (U) GDP Growth Rate Slows to 3.9 Percent, Slowest in 3 Years: The
Bank of Korea reported that the Korean economy grew 3.9 percent
year-on-year in the third quarter, the slowest since the second
quarter of 2005. (Separately, on a quarter-on-quarter basis, the
economy expanded 0.6 percent between July and September, the weakest
growth since the economy grew 0.5 percent in the third quarter of

3. (U) October Current Account Surplus of USD 4.91 Billion Sets
Record: Korea's current account balance was recorded by the Bank of
Korea at USD 4.91 billion in October, the largest since the data was
first recorded in 1980. The October result reduced the cumulative
2009 current account deficit from over USD 13 billion to USD 9
billion. The surplus reflected a surge in exports, particularly of
petrochemical and ships. The surplus also reflected a sharp decline
in imports because of lower commodity and oil prices. Koreans also
cut back on overseas travel in October due to the weakening won.

4. (U) Industrial Output Grows 6.1 Percent in September: The
National Statistical Office announced on October 30 that industrial
production increased by 6.1 percent in September from a year
earlier, up from a 1.9 percent gain in August. Output growth
remained in single digits for the fifth consecutive month.

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Seasonally adjusted production fell 0.6 percent from a month
earlier, compared with a 2.2 percent month-on-month drop in August.

5. (U) Retail Sales Drop and Construction Slows in September: The
National Statistical Office reported on October 30 that domestic
retail sales dropped 2 percent in September from a year earlier
despite falling consumer prices, as more consumers tightened their
purse strings due to the tight job market and worsening economic
conditions. Seasonally adjusted sales also decreased 3.8 percent
month-on-month. Corporate facility spending on machinery and
telecommunications increased 7.3 percent, compared with a 1.5
percent jump the previous month. However, orders received by
construction companies fell 40.4 percent from a year earlier because
of the continued housing slump.

6. (U) Consumer Sentiment Falls on Economic Gloom: Consumer
confidence has dropped due to fears of slowing growth and plunging
asset values. In a third-quarter survey of 2,200 households in 30
cities, the Bank of Korea found that its consumer survey index (CSI)
fell to 88 from 96 in the second quarter. This is well below the
benchmark 100 point level, meaning that pessimists outnumber
optimists. The CSI for economic conditions for the coming six
months fell to 61 from 82 a quarter ago, while the index measuring
expectation for job opportunities dipped to 60 from 80. The index
for future spending on dining-out and travel fell to 76 and 71 from
83 and 80, respectively, suggesting that consumers will further
tighten their purse strings in the months to come.

7. (U) Moody's Keeps 'Stable' Outlook for Korea: On October 17,
Moody's Investors Service confirmed that it will maintain its A2
"stable" outlook for South Korea's government-issued bonds based on
the "ability of authorities to manage the country's vulnerability to
the global financial market crisis and avoid a deep and sustained
deterioration in relative credit metrics."

8. (U) Wide Range among Forecasts for 2009 Korean Economic Growth:
Various institutions and firms started in late November to publish
forecasts for Korea's economic growth for 2009. The Samsung
Economic Research Institute is the most optimistic with a projection
of 3.2 percent GDP growth. Finance Minister Kang, while setting a
goal of over 3 percent GDP growth, has acknowledged that growth
below 3 percent is possible. The OECD has projected 2.7 percent GDP
growth for Korea in 2009. Citigroup is in the middle of the
forecasts with its announcement of 2 percent growth in 2009.
Macquarie Securities Ltd. sees a 2 percent contraction in Korean GDP
in 2009. UBS AG has generated the most pessimistic forecast with an
expected 3 percent GDP contraction.

9. (U) National Assembly Says Korea's Black Market is Biggest in
OECD: According to data submitted to Rep. Lee Jong-koo of the Grand
National Party by the National Assembly Research Service, the size
of Korea's underground economy was equivalent to 27.6 percent of its
total output in 2005, the largest among 22 OECD member economies.
The estimated size of the black economy reached USD 218 billion that
year. The underground economy in the United States accounted for
7.9 percent of its GDP; 8.5 percent in Switzerland; 8.8 percent in
Japan and 23.2 percent in Italy. The OECD average was 14.8

10. (U) "C&Group" Units Move into Debt Workout: C&Heavy Industries
and C&Woobang, both units of the C&Group conglomerate applied in
late November to their primary lenders (Woori Bank and Daegu Bank)
for a debt rescheduling program. This development followed news
that the companies and other C&Group subunits faced financial
trouble. The news, which broke on October 30, drove the stocks of
four subunits of C& Group down by close to 15 percent and chilled
the entire market.
Currently, the company's overall loans are estimated at less than
USD 1 billion.

Finance and Structural Policies

11. (U) U.S.-Korea USD 30 Billion Currency Swap Deal: On October 30,
the Bank of Korea (BOK) announced a temporary USD 30 billion
currency swap contract with the U.S. Federal Reserve in a bid to
ease pressure on the won in the midst of the global credit crunch.
The agreement expires on April 30, 2009. The United States also

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signed similar contracts with Brazil, Mexico and Singapore. Korean
equity and currency markets responded to the news with 12 percent
gains on October 30. Traders and government officials have told the
Embassy that the swap was a huge event -- reducing fear in Korean
markets and increasing stability. The BOK announced it will tap the
first USD 4 billion in early December and will supply the currency
to local banks through competitive auction facilities. The
agreement was announced on the same day as the International
Monetary Fund's (IMF) announcement of the establishment of a
Short-Term Liquidity Facility, which is designed to help member
countries deal with liquidity problems on global capital markets.
Korea can draw a maximum of USD 22 billion through IMF mechanisms.
However, President Lee subsequently announced that the government
had sufficient access to foreign reserves and would not be drawing
on IMF funds.

12. (U) Korea Seeks to Increase Korea-China Currency Swap Line:
South Korea is seeking a USD 10-30 billion currency swap deal with
China as talks between the two nations are nearing an end, said
government and central bank officials on November 4. Currently, the
two countries have a currency swap contract under which South Korea
is able to borrow up to USD 4 billion from China. The deal for an
extended swap, if realized, would create an additional liquidity
line for South Korea, and help it deal with the short-term foreign
liquidity crunch. The government has been seeking extended currency
swap deals with China and Japan as part of efforts to secure enough
dollars to ride out the ongoing financial turbulence.

13. (U) Additional Liquidity of USD 16 Billion Announced for
Corporations: The Ministry of Strategy and Finance and Bank of
Korea (BOK) announced on November 13 that ROKG financial authorities
will begin injecting an additional USD16 billion into its financial
system to help creditworthy firms, especially small and medium sized
enterprises (SMEs) experiencing short-term liquidity problems, to
finance business activities. The package will include a USD10
billion injection from the BOK into SMEs to help them borrow
dollars. The Ministry of Strategy and Finance will supply USD 6
billion to SMEs and conglomerates for export finance through the
Export-Import Bank of Korea. The USD 16 billion will have a
maturity of six months.

14. (U) Financial Services Commission to Create USD 7 Billion Fund
to Ease Corporate Bond Squeeze: Korea's Financial Services
Commission announced on November 13 a plan to set up a fund of 10
trillion won (USD 7.17 billion) to help stabilize the bond market
and ease a corporate funding squeeze. The fund would buy various
bonds, including bank and corporate debts, but only those with a
strong credit rating. As part of the plan, state-run policy banks
such as Korea Development Bank (KDB) are expected to contribute
several trillion won into the fund by selling debts after a capital
base increase by the government.

15. (U) Bank of Korea Cuts Key Rate to 4 Percent: The Bank of Korea
(BOK) cut its key interest rate 0.25 percent on November 7 to 4
percent. This was the third rate cut in less than a month. The BOK
slashed its key interest rate on October 27 by a
larger-than-expected 0.75 percentage point in a bid to help ease
financial strains facing local banks and companies, following a 0.25
percent point rate cut on October 9. The BOK monetary policy
committee on November 7 hinted the possibility of more rate cuts to
come and said it "will do what is needed to ward off the risk of a
severe slowdown in economic activity."

16. (U) BOK Loans Set for Small Firms: The Bank of Korea decided in
mid-October to increase its loan pool by 2.5 trillion won (USD 2
billion) to help small businesses suffering from a liquidity crisis.
The Monetary Policy Committee agreed to increase the ceiling on
low-rate loans provided to commercial banks to 9 trillion won (USD
6.9 billion) from the current 6.5 trillion won (USD 5 billion). It
is the first increase since October 2001, when the capital market
collapsed after the September 11 attack on the United States.

17. (U) Overall Loan Default Rate Hits 0.97 Percent; SME Default
Rate up to 1.5 Percent: Banks are seeing a rising default rate on
loans to small businesses. According to the Financial Supervisory
Service (FSS), the default rate of loans made in the Korean currency
averaged 0.97 percent as of the end of September, rising 0.08
percentage points from a year ago. The default rate on bank lending
to small and medium sized firms, however, was much higher at 1.5
percent, a 0.28 percentage-point increase from a year ago. A

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soaring won/dollar rate and global raw material price hikes are
making it increasingly difficult for small firms to pay back loans
on time. The default rate for corporate lending rose 0.18
percentage points to 1.3 percent. Default rates for conglomerates
and households, on the other hand, are falling. The rate for large
businesses fell 0.07 percentage points to 0.31 percent, while that
for households was 0.58 percent, down 0.08 percentage points.

18. (U) Banks' Short-Term Foreign Debt Growth Fastest in Eight
Years: Korean banks held USD 56.9 billion in short-term foreign
debts in June, up 41.7 percent from a year earlier, the highest
rate since 2000. Banks' total external liabilities, including both
short and long-term, reached USD 127.4 billion at the end of June,
up 37 percent from a year ago. Korea's external liabilities reached
USD 419.8 billion as of September 30, with external credits
amounting to USD 422.5 billion. Foreign debts that mature within a
year accounted for USD 222 billion. Banks sharply increased
borrowing overseas to realize gains on the interest rate difference
between Korea and other countries, while buying currency futures
from investors of foreign equity funds and shipbuilders. This build
up in short-term debt has been cited by analysts as a primary factor
in the recent volatility of the won. With the won losing ground
against the dollar rapidly over the past few months, banks now have
to pay more to rollover dollar-denominated loans, incurring
significant financial losses.

19. (U) Korea's FX Reserves Dip to USD 212 Billion: South Korea's
foreign exchange reserves fell in October from USD 239 billion to
USD 212 billion, as the Bank of Korea increased foreign liquidity to
address financial jitters and ease the dollar shortage in Korea's
markets. The BOK said foreign exchange authorities supplied more
than USD 20 billion to the market, mainly through swap deals or the
state-run Export-Import Bank of Korea (EXIM) in October, adding that
most of the amount was used to repay the foreign debts of local
banks. The fall in foreign reserves came as South Korea's currency
market has been suffering from a dollar shortage from the impact of
the global financial turmoil. October marked the seventh straight
month of decline, and was the steepest drop in forex reserves since

20. (U) USD 100 Billion Guarantee for Bank Borrowing Approved by
National Assembly: On October 30 the National Assembly passed a
massive bank bill, in which the government will guarantee banks'
foreign currency debt for three years. Under the motion, the
government will guarantee up to USD 100 billion in foreign currency
loans undertaken through June 2009 for a period of three years. The
measure is intended to ease Korean banks' access to dollars when
many other governments had undertaken actions to guarantee their
banks' operations in the midst of the global financial turmoil. The
lawmakers, however, put strict conditions on the measure, which
include banks' efforts to sell overseas assets and cut the salaries
of bank executives and employees.

21. (U) Foreign Investors' Stock Selling Through October Hits Record
$30 Billion: Foreign investors' net selling of South Korean stocks
hit a record high this year amid the spreading global credit crunch.
The Financial Supervisory Service reported overseas investors sold
a net 42.61 trillion won (USD 29.59 billion) worth of local stocks
as of October 24, the highest figure since the market's opening in
1992 and a significant jump from a 30.56 trillion won (USD 32.9
billion) net sale for all of 2007. The relative ease of stock sales
in Korea combined with the need of institutional investors to raise
cash in the midst of global financial turmoil have driven this
action in October and November.


22. (U) Inbound FDI Smaller than in 2007: South Korea attracted USD
2.87 billion in foreign direct investment (FDI) in the third quarter
of the year, down 2.6 percent from the same period in 2007. The
financial and insurance sector saw inbound FDI decrease 29.2 percent
in the third quarter from 2007 as global financial markets faced
increasing pressures, while manufacturers attracted 8.5 percent
more. Greenfield foreign investments, including the construction of
plants, increased 4 percent to USD 1.91 billion, while merger and
acquisition FDI fell 13.7 percent to USD 960 million.

23. (U) Nation's Global Competitiveness Falls 2 Notches to

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Thirteenth: South Korea's global competitiveness moved down two
places from last year to land at 13th this year in the World
Economic Forum's Global Competitiveness Report 2008-2009. The
report reduced Korea's scores on infrastructure, labor market
efficiency, financial market sophistication, and corporate


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