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UNCLAS SECTION 01 OF 05 SEOUL 002293 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - NOVEMBER 2008 
 
------------- 
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 
Assembly 
Foreign Investors' Stock Selling Through October Hits Record $30 
Billion 
 
Investment 
---------- 
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 
2004). 
 
¶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. 
 
SEOUL 00002293  002 OF 005 
 
 
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 
percent. 
 
¶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 
 
SEOUL 00002293  003 OF 005 
 
 
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 
 
SEOUL 00002293  004 OF 005 
 
 
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 
1997/98. 
 
¶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. 
 
 
Investment 
---------- 
 
¶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 
 
SEOUL 00002293  005 OF 005 
 
 
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 
innovation. 
 
STEPHENS