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Growth Could Fall on North Tensions

Posted October. 30, 2006 07:03,   


On October 29, the Korea Economic Research Institute (KERI) of the Federation of Korean Industries (FKI) released a report titled, “The Scenario after the North Korean Nuclear Test and the Economic Outlook for Next Year.” It forecast, “Next year’s economic growth rate might nosedive to two percent or below if a brushfire conflict occurs between South and North Korea due to the North’s nuclear test.”

The KERI stated, “Under the ‘basic scenario’ that there might be some discord after economic sanctions against North Korea, the economic growth rate for next year is projected to be at 3.8 percent. Under the ‘worse-case scenario’ of a local armed conflict between the two Koreas, however, the rate might rapidly drop to 1.9 percent.”

The “basic scenario” refers to a situation where discord with North Korea might weaken consumer/investor confidence, lower Korea’s international credit standing, and lead to sluggish domestic consumption and a slower capital inflow.

The worse-case scenario assumes South Korea’s sovereign rating might drop below investment grade due to an inter-Korean armed conflict.

Not reflecting the variable of a North Korean nuclear test, the economic growth estimates for next year that have so far been released by government-funded or private research institutes have mostly been at the four-percent mark. The KERI’s economic outlook for next year is the first to reflect the factor.

Heo Chan-guk, director of the KERI’s corporate research headquarters, indicated, “If an armed conflict takes place between the two Koreas, the economic growth rate would fall dramatically as domestic confusions—a rapid increase in dollar demands and hoarding of necessity goods due to intensifying social anxieties—and external shockwaves such as a sovereignty rating decrease would happen all at the same time.”

Both Current Account and Capital Account Might Go into the Red-

According to the Bank of Korea (BOK), foreign direct investment in Korea from January to late September of this year—with the aims of building a factory here or purchasing ten percent or more of a company’s stocks to win the management right—stood at $787.7 million, a sharp decrease to only one fourth of what was invested in the same period of last year ($3.4191 billion).

Meanwhile, Koreans’ direct investment abroad grew by nearly 50 percent year-on-year from $3.3215 billion to $4.9705 billion. As the amount of money that Koreans brought abroad for investment outnumbered what foreigners brought here, it can be said that as much as $4.1828 billion were leaked abroad.

The field of securities (stocks and bonds) investment was no exception.

As foreigners retrieve the money they invested in the Korean stock markets, a total of $2.956 billion flew out of Korea from January to September this year.

During the same period, domestic investors also brought $17.179 billion abroad to buy overseas stocks or bonds, leading to a deficit of $20.1358 billion in the securities investment account.

“The capital account will enjoy a surplus this year as there are abundant short-term loans from abroad. Next year, however, foreign direct investment will not go up while Koreans’ overseas investment will increase due to foreign exchange liberalization. As a result, not only the current account but also the capital account will go into red ink,” said Lee Gyu-bok, a researcher at the Korea Institute of Finance (KIF).

Uncertainties Around Exports and International Oil Prices-

The Korea International Trade Association (KITA) stated in its survey report released on October 29, “Difficulties Faced by Korean Exporters to Japan due to Falling Won-Yen Exchange Rates,” that a growing number of Korean businesses exporting components or agricultural/aquatic products—goods that compete with Chinese ones in the Japanese market—are giving up on their exports to Japan due to a fall in won-yen exchange rates.

“Some businesses are facing the triple difficulties of falling exchange rates, oil price hikes and rising raw material prices,” said researcher Shin Seung-gwan of the KITA. “Those that chose to keep exporting in order to retain the Japanese market are calling for a measure to deal with the difficulties.”

It was also projected that international oil prices might go up again next year.

In its report, “Will the International Oil Prices Keep Falling?” published on October 29, the Hyundai Research Institute (HRI) estimated, “There remain uncertainties related to oil prices, such as long-term supply/demand imbalance, growing demands from China and other developing countries, and unstable political situations in the Middle East. If [the oil prices] go up to $85 per barrel (based on Dubai oil), a third ‘oil shock’ might occur.”

It is expected that on the basis of its crude oil imports last year, Korea might see its current account drop by about $8.4 billion if the per-barrel oil prices increase by $10.”

Prices and Utility Charges Also Going Up-

Domestic prices are also going up.

According to the Ministry of Finance and Economy (MOFE) and other government agencies, utility charges such as train charges, postal rates and bus fares will be raised starting next month. The train charges, which have remained the same since 2003, go up by an average 9.3 percent in November, including KTX (9.5 percent), Saemaeul (8 percent), Mugunghwa (9 percent), commuter trains (8 percent) and freight trains (10 percent).

Domestic postal rates will also increase next month. The rates of standardized mails weighing 5g or below will go up from 190 won to 220 won, those between 5g and 25g from 220 won to 250 won and those between 25g and 50g from 240 won to 270 won; non-standardized mails weighing up to 50g will cost 340 won, up from the previous rate of 310 won.

Cigarette prices are also likely to rise. On November 6, the Health and Welfare Committee of the National Assembly will discuss the plan for a cigarette price increase in earnest. Drawing up the budget at the end of last year, the government had announced it would increase cigarette prices by 500 won starting July of this year.