Cablegate: South Korea Economic Briefing - November 2009

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DE RUEHUL #1873/01 3340626
ZNR UUUUU ZZH
R 300626Z NOV 09
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC 6347
RUCPDOC/USDOC WASHDC 9460
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEAUSA/DEPT OF HHS WASHDC
RHEHNSC/NSC WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 7045
RUEHBJ/AMEMBASSY BEIJING 6986
RUEHGP/AMEMBASSY SINGAPORE 7510
RUEHHK/AMCONSUL HONG KONG 4048
RUEHSH/AMCONSUL SHENYANG 5363
RUEHVK/AMCONSUL VLADIVOSTOK 1773
RUEHIN/AIT TAIPEI 4296

UNCLAS SECTION 01 OF 03 SEOUL 001873

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - NOVEMBER 2009

1. (U) This cable is sensitive but unclassified and not/not intended
for Internet distribution.

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In This Issue
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-- Korea's Trade Dependency Over 90 Percent
-- Foreign Currency Reserves Continue to Rise
-- International Organizations Raise ROK Economic Outlook
-- Production Soared 11 Percent in September
-- Overseas Construction Orders Jump to USD 32 billion
-- ROKG to Expand Overseas Agriculture Aid
-- Trade Surplus Drops in October on Falling Exports
-- Tax Office Targets Illegal Capital Outflow
-- Korea's Current Account Resurged in September
-- Korea Ranks 26th in World Prosperity Index
-- Korea Waives Building Restrictions in Seoul to Attract
FDI
-- Hynix Sale Facing Tough Road Ahead
-- Domestic Banks Lose 1.2 Trillion Won in Derivatives
Trading
-- Government to Aid Shipbuilding and Shipping Industries

Domestic Economy
----------------

2. (SBU) Korea's Trade Dependency Over 90 Percent: The Ministry of
Strategy and Finance (MOSF) reported the total trade dependency in
2008 reached a record-high 92.3 percent. Trade dependency is
defined as exports plus imports divided by gross domestic product.
Korea's dependency on trade had been in the 50-70 percent range
since the year 2000. Surging by nearly 30 percentage points last
year, Korea now ranks 11th in trade dependency out of 93 countries
surveyed in 2008. The dependency for the first six months of this
year declined to 83.8 percent due to sluggish external demand caused
by the global economic crisis.

3. (SBU) Foreign Currency Reserves Continue to Rise: The Bank of
Korea reported that foreign currency reserves swelled by USD 9.94
billion from September to USD 264.19 billion at the end of October,
the largest amount since posting USD 264.25 billion in March 2008.
Monthly gains over the past eight months have reached USD 62.65
billion. With the current pace, foreign reserves are expected to
break a record high in November.

4. (SBU) International Organizations Raise ROK Economic Outlook: On
November 10, the World Bank raised its forecast for Korea's economic
growth for 2009 from -3 to -3.5 percent to -0.7 percent. The Bank
also raised its forecast for Korea's 2010 GDP growth to 3.7 percent
from its previous projection of two percent. The World Bank
attributed its upgrade to Korea's improved export competitiveness.
Meanwhile, the Organization for Economic Cooperation and Development
(OECD) said on November 19 that the Korean economy will expand by
4.4 percent next year, hinting that it will undergo a V-shaped
recovery. OECD
Secretary General Angel Gurria advised, however, that the government
should maintain its economic stimulus measures because growth was
still at an early stage and appeared to be mostly driven by
state-led expansionary policies.

5. (SBU) Production Soared 11 Percent in September: The NSO said
that production in the mining, manufacturing, electric, and gas
industries increased 11 percent from a year earlier in September,
rising for three consecutive months. On a month-on-month basis,
production grew 5.4 percent from August, swinging back after
dropping 1.3 percent a month earlier. Sales of consumer goods
gained 1.8 percent from August and 6.7 percent from a year earlier,
while facilities investment jumped 18.8 percent month-on-month and
5.8 percent year-on-year.

6. (SBU) Overseas Construction Orders Jump to USD 32 billion:
According to the Ministry of Land, Transport and Maritime Affairs
and the International Contractors Association of Korea, overseas
construction orders granted to domestic companies totaled USD 32.3
billion as of November 3, 2009, exceeding USD 30 billion in annual
terms for the third consecutive year and marking the third largest
total since 1965, when Korea began overseas construction projects.

SEOUL 00001873 002 OF 003

The figure is expected to reach USD 40 billion by year-end.

7. (SBU) ROKG to Expand Overseas Agriculture Aid: On November 17,
ROKG officials announced an increase in agricultural aid to
developing countries suffering from chronic food shortages. In a
keynote address at the Food and Agriculture Organization's (FAO)
food security meeting in Rome, Chang Tae-pyong, Minister of Food,
Agriculture, Forestry and Fisheries, said South Korea will donate
150,000 tons of rice to the Asian Emergency Food Reserve Program.
This follows a September announcement that the country would provide
USD 100 million in aid over the next three years to help improve
food security issues for developing economies.

8. (SBU) Trade Surplus Drops in October on Falling Exports: Korea's
trade surplus fell slightly in October from a month earlier as
exports declined and imports slightly increased. According to the
Korea Customs Service (KCS), the nation's trade surplus stood at USD
3.63 billion in October compared to USD 4.7 billion the previous
month. Exports fell 1.6 percent on-month to USD 34 billion in
October, while imports rose 1.8 percent to USD 30.3 billion. On an
annual basis, exports fell 8.5 percent and imports dropped 16
percent from a year before. In the first ten months of the year,
cumulative exports reached USD 294 billion, down 19.7 percent from a
year ago, while cumulative imports fell 31.5 percent on-year to USD
260.3 billion. KCS predited the nation's trade volume would expand
in the coming months from rising imports of oil products.

9. (SBU) Tax Office Targets Illegal Capital Outflow: The National
Tax Service (NTS) created an "Overseas Tax Evasion Report Center" on
November 18 to crack down on offshore tax evaders and monitor
illegal capital outflows. The Center will collect and analyze
information on suspicious investments offshore, and coordinate with
foreign agencies to share information on tax crimes. In particular,
NTS will monitor firms which open shell companies in tax havens
overseas and then remit money to the ROK.

10. (SBU) Korea's Current Account Resurged in September: The Bank of
Korea (BOK) stated that thanks to a soaring trade surplus in goods,
the current account surplus amounted to USD 4.2 billion in
September, more than double the figure recorded in August. Both
imports and exports in September sharply rose by USD 2.78 billion
and USD 4.89 billion from the previous month to USD 29.7 billion and
USD 35.2 billion, respectively, while the year-on-year drops in
imports and exports narrowed to 23.9 percent and 7.9 percent.

11. (SBU) Korea Ranks 26th in World Prosperity Index: According to
the Financial Times, Korea ranked 26th out of 104 countries in the
Legatum Group's Prosperity Index. The Legatum Group (a London-based
independent research, policy and advocacy organization) created the
index, which is based on nine factors, including democracy, economy
and governance. Korea received high scores in economic base,
entrepreneurship/innovation, education and governance, while needing
improvement in individual liberty. Finland ranked first in the
index.

Finance and Structural Policies
-------------------------------

12. (SBU) Korea Waives Building Restrictions to Attract FDI: In the
interest of promoting foreign investment, the Ministry of Knowledge
Economy (MKE) will waive the factory building restriction at
non-industrial complex zones in the Seoul metropolitan area for
foreign companies making large investments in Korea. Foreign
companies must plan to invest at least USD 30 million to qualify for
the exemption.

13. (SBU) Hynix Sale Facing Tough Road Ahead: Creditors of Hynix
Semiconductor have agreed to sell their combined stakes in the
world's second largest memory chipmaker through an open bidding
process. However, officials doubt that the INcheon-based technology
firm will find the right buyer by next month. The collective
28.07-percent stake is worth about 4 trillion won (USD 3.5 billion).
Korea Exchange Bank (KEB), representing creditors, plans to issue
invitations for the auction to domestic companies between November
25 and December 15. The action follows Hyosung Group's recent
decision to retract its bid. Although top Hynix sources are hoping
that one of the nation's top-10 conglomerates will register a bid,
POSCO, LG Group, SK Group and Hyundai Heavy officials have told

SEOUL 00001873 003 OF 003

local media they are not interested. Creditors may also sell 10 to
15 percent stakes to institutional investors through block sales if
the public auction is unsuccessful.

14. (SBU) Domestic Banks Lose 1.2 Trillion Won in Derivatives
Trading: The Korea Institute of Finance (KIF) estimated that five
major domestic banks - Kookmin, Woori, Shinhan, Korea Exchange and
Hana - have lost 1.2 trillion won (USD 1 billion) from investments
in derivatives in the first half of this year. The think tank also
claims the losses are in stark contrast to the success of two major
foreign banks - Citibank Korea and Standard Chartered Korea - which
enjoyed combined gains of 495.4 billion won (USD 430 million) from
derivatives transactions during the same period. The institute said
that the seven banks earned 601.4 billion won (USD 545 million) in
products for the first half in 2008, but lost 406 billion won (USD
368 million) in the second half of last year due to the global
financial crisis that swept the world in August 2008. Outstanding
derivatives contracts held by all seven banks fell 13.8 percent
year-on-year to 1,398.4 trillion won (USD 1.216 billion) by the end
of June. Standard Chartered Korea ranked in the top spot with an
outstanding balance of 328.9 trillion (USD 286 billion), followed by
Shinhan Bank (244.2 trillion won or USD 212 billion) and Citibank
Korea (203.4 trillion won or USD 177 billion).

15. (SBU) Government to Aid Shipbuilding and Shipping Industries: On
November 9, the government announced intentions provide more
liquidity to the shipbuilding and shipping industries. Based on the
decision, the government will expand financial aid for companies in
ship manufacturing and ease requirements on the loan-to-value ratio
for shipping companies. This program will most likely impact
smaller shipbuilders, but will be open to all
shipbuilding companies with liquidity problems. Con- currently, the
government will continue restructuring the eight shipbuilding
companies that received grades of C and D in a credit risk
evaluation, and encourage them to redirect their businesses into
repair dockyards or ship component factories.

STEPHENS

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