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Individual, Corporate Spending Falls

Posted September. 23, 2006 03:55,   


“I don’t need additional money.”

Mr. Han (43), who runs a medical glass bottle manufacturing company in Bupyeong-gu, Incheon, says this whenever he receives a call from banks recommending that he borrow money.

Han’s company S, whose annual sales are 10 billion won, needs to invest 300 million won in aging facilities by the end of this year. However, S does not have to take loans from financial institutions, thanks to its reserve ration that amounts to one billion won.

The spending of individuals and corporations is decreasing. Economists point out that a decrease in money demand leads to less liquidity in the market, and it further worsens consumer sentiments.

Consumer Sentiment Index Falls to Lowest Mark in Seven Quarters-

The consumer survey index that released by the Bank of Korea on September 22 reports that the third quarter consumer sentiment index dropped five points to 96, below the second quarter’s figure of 101. It is the lowest in the past seven quarters since the fourth quarter of 87 in 2004. An index value below 100 reflects a higher percentage of pessimistic consumers, compared to those that are optimistic.

Restrictive property regulations and the likelihood of a decrease in housing prices discourage individuals to make a loan from financial entities.

Kim Tae-jeong (41, Hwajeong-dong, Goyang), who once thought of buying a new house after the expiring of a long-term rental contract, has decided to expand his contract for another two years.

He said, “I believe that making prudent investments is important, especially at a time when we cannot predict volatility in the housing market.

An increasing number of people appear to agree with him, as loans on property collateral are rapidly decreasing. Loans on real estate collateral rose to only 1.33 trillion won in August, compared to the sharp rise of 3.17 trillion won in April.

Boosting Companies’ Financial Health-

Small and Medium-sized Enterprises (SMEs) increased investments with bank loans in the fist half of this year, but this trend has changed in the second half of the year. SME debt rose to 5.0055 trillion won during April, but only increased by 2.384 trillion won in August.

Park Ju-yeong, director of the loan planning division at Industrial Bank, analyzed, “As December is approaching, SMEs are reducing their loans to target their annual business performances. Furthermore, with a sign of economic slowdown, they’re delaying facility investment.”

However, the savings rates of corporations are increasing as they delay investment. The Stocks and Futures Exchange announced that among 539 manufacturing companies, reserve rations average 597.61 percent, up 23.25 percent from 574.36 percent last year.

With spending of corporations and individuals shrinking, the fund flows are also slowing down. According to the Bank of Korea, a seasonally adjusted circulation speed of money (M2) fell from 0.81 in the fourth quarter last year to 0.80 in the first quarter of this year and to 0.79 in the second quarter. A circulation speed of money means the average number of commercial trading within a specific period. Low figures indicate that economic activities among economic players are expected to decrease. Economic experts explain that economic sentiments are getting worse in such a circumstance.

Shin Yeong-min, a researcher at an LG economy institution, said, “In order to improve fund flows, the government needs to implement measures as soon as possible. For instance, for individuals, property market boosting measures are needed, and for corporations, there needs to be an easing of restrictions and an expansion of public investment.”