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RHEHNSC/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 SEOUL 000314 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG ETRD EINV KS
SUBJECT: SEOUL ECONOMIC BRIEFING -- FEBRUARY 2009 
 
------------- 
In This Issue 
-------------- 
 
Domestic Economy 
---------------- 
 
Korea,s 2008 Current Account Posts USD 6.41 Billion Deficit 
Business Survey Reveals Expectations for Continued Economic 
Recession 
Unemployment Rate Began to Rise in December 2008 
 
 
Finance and Structural Policies 
------------------------------- 
 
Restructuring Underway for the Construction and Shipbuilding 
Sectors 
FSC's Annual Plan for Deepening Financial Deregulation 
Controversy over Government Control of Seoul Bourse 
Banks' Delinquency Ratios Rising but Still Stable with High 
Loan Loss Provisions 
BOK Eases Lending Rules on Collateral 
Collapse of KDB-Hanwha Deal for Sale of Daewoo Shipbuilding 
 
 
Domestic Economy 
---------------- 
 
¶1. (U) Korea,s 2008 Current Account Posts USD 6.41 Billion 
Deficit: South Korea,s 2008 current account shifted to a 
deficit of USD 6.41 billion from 2007,s surplus of USD 5.88 
billion dollars.  The goods account surplus decreased to USD 
5.99 billion from the previous year's 28.17 billion dollars, 
due to the increase in prices of crude oil and other raw 
materials.  The services account deficit declined to USD 
16.73 billion from the previous year's USD 19.77 billion, as 
the travel account deficit narrowed significantly and the 
transportation account surplus widened.  The current account 
picture shifted dramatically late in the year as oil and 
commodity prices tumbled.  The cumulative current account 
deficit peaked at USD 13.93 billion in September and then, as 
oil prices fell, dropped by more than half by the end of the 
year.  Monthly current account surpluses were USD 4.92 
billion in September, USD 1.91 billion in November, and USD 
0.86 billion in December.  Most analysts believe the ROK will 
a current account surplus in 2009, although the figure for 
January was a USD 1.36 billion deficit. 
 
 
¶2. (U) Business Survey Reveals Expectations for Continued 
Economic Recession: In January 2009, the Bank of Korea,s 
business survey index (BSI) on business conditions in the 
manufacturing sector remained at an extremely low level, but 
moved one point higher than in December.  The score of 47 
(where anything below 100 indicates negative conditions) 
reflects continuing sluggish sales but slightly improved 
profitability.  January,s BSI score for the outlook (for 
February) rose from 44 to 49 in expectation of increased 
sales and improved profitability.  In the non-manufacturing 
sector, the BSI for January remained at 59, while the outlook 
BSI (for February) increased from 55 to 59. 
 
¶3. (U) Unemployment Rate Began to Rise in December 2008: The 
National Statistical Office reported that the ROK,s 
unemployment rate remained at 3.2 percent in 2008.  In 
December, however, the labor market began to reflect the 
economic slowdown as unemployment rose 0.2 percent point 
year-on-year to 3.3 percent and the number of unemployed 
persons increased by 51,000 to 787,000.  This unemployment 
figure does not reflect the unquantified contraction of the 
informal labor sector, predominantly composed of foreign 
workers from countries such as China and the Philippines. 
Ethnic Korean Chinese workers (known as Yanbianese as they 
come from the province of Yanbian) have taken a large number 
of labor jobs at construction sites, factories, restaurants, 
and in homes in recent years.  Tens of thousands of 
Yanbianese, however, have reportedly been departing for China 
in recent months as the Korean labor market declines and the 
weak won undermines the attractiveness of employment in 
 
SEOUL 00000314  002 OF 003 
 
 
Korea.  We anticipate further increases in the unemployment 
rate in 2009 despite government and corporate efforts to cut 
costs without shedding labor. 
 
 
Finance and Structural Policies 
------------------------------- 
 
¶4. (U) Restructuring Underway for the Construction and 
Shipbuilding Sectors: The Korea Federation of Banks, 
representing the creditor financial institutions, announced 
in late January the result of the first phase of their credit 
risk evaluation by reviewing 19 shipbuilding and 92 
construction firms.  The ROKG urged these evaluations to 
remove the weakest firms from the market and clear the 
clogged flow of credit under the current difficult economic 
conditions.  14 of the 111 companies reviewed were listed as 
in need of restructuring.  The evaluation gave C& Heavy 
Industries (a shipbuilder) and Daeju Construction the lowest 
score, moving them into bankruptcy court.  The creditors 
rated the other 12 as troubled, but able to recover with debt 
restructuring.  Creditors and ROKG financial authorities 
began the second phase of the restructuring in February. 
They are now evaluating the credit risk of the remaining 
(smaller) shipbuilding and construction firms. 
 
¶5. (U) FSC's Annual Plan for Deepening Financial 
Deregulation: On January 22, the Financial Services 
Commission (FSC) unveiled its annual plan for financial 
deregulation.  This year the themes are: economic recovery, 
small and medium size enterprise, relief for low income 
families, and job creation.  The FSC identified over 130 
necessary actions -- 25 would require amending legislation, 
39 would require amended presidential decrees, and 60 or so 
would require action by the FSC itself.  Approximately half 
are focused on SMEs and most of the remainder are aimed at 
improving the investment climate.  The FSC has pledged to 
ease new business entry into electronic (including internet 
and mobile phone) banking and, consistent with the Capital 
Markets Consolidation Act, to allow financial firms to move 
into non-core businesses more easily.  Additional actions are 
aimed at reducing the operational burden of small financial 
companies. 
 
¶6. (U) Controversy over Government Control of Seoul Bourse: 
The government's decision to put the country's bourse 
operator under its control is creating controversy.  The 
Finance Ministry announced on January 29 that it had 
designated the Korea Exchange (KRX) as a public organization 
following the recommendation of the Board of Audit and 
Inspection, which ruled that the move was required because 
the KRX performs a function with a legally mandated monopoly. 
 (This move does not change the private sector ownership of 
KRX, but subjects it to government oversight).  The decision 
did not end the acrimonious debate over the status of KRX. 
The executive board of the KRX held a meeting on January 30 
and decided to start a long-term legal battle to challenge 
the decision.  The KRX Union's reaction has been far more 
aggressive and it is considering options including a general 
strike.  KRX and its union claim this measure would harm the 
corporate value of KRX and eventually affect the global 
competitiveness of the Korean equity market.  Headquartered 
in Busan, with its Seoul office located at the heart of 
Yeouido's financial district, KRX has also been a matter of 
interest for Busan citizens.  An alliance of Busan citizens 
held a press conference, and warned that they will continue 
to fight until the government cancels the designation.  The 
government has some support within the financial services 
industry, however, as KRX is seen as abusing its monopolistic 
market power without any outside force to control them -- 
particularly with respect to the high wage levels of its 
employees.  KRX is owned by securities companies, but they 
have long complained that they have almost no control over 
the firm. 
 
¶7. (U) Banks' Delinquency Ratios Rising but Still Stable with 
High Loan Loss Provisions: The delinquency ratio for 
won-denominated bank loans as of end-December, 2008, rose by 
0.34 percentage points to 1.08 percent from 2007.  The 
delinquency ratio for corporate loans increased to 1.46 
 
SEOUL 00000314  003 OF 003 
 
 
percent, up 0.54 percentage points from a year before. The 
driver for this was the increase in the delinquency ratio of 
SMEs, which moved from 1 percent to 1.7 percent due to 
worsening business conditions.  More hopefully, the 
delinquency ratio of large corporations fell 0.03 percentage 
points to 0.34 percent.  The delinquency ratio for household 
loans stands at 0.60%, up just 0.05 percentage points. 
Despite the generally increasing loan delinquency rations, 
the Financial Supervisory Service assessed the asset 
soundness of domestic banks at favorable levels, noting that 
the coverage ratio (loan loss provision/standard or below 
loans) of 175.1 percent was much higher than 88.7 percent 
figure for U.S. commercial banks. 
 
¶8. (U) BOK Eases Lending Rules on Collateral: The Bank of 
Korea (BOK) on February 9 eased rules governing BOK lending 
to local financial institutions to help ease a local credit 
crunch. The central bank broadened beyond government bonds 
the range of securities it will accept from banks seeking to 
borrow funds.  As examples of acceptable securities, the BOK 
cited commercial paper and promissory notes issued by 
companies that borrowed funds from the commercial bank. 
 
¶9. (U) Collapse of KDB-Hanwha Deal for Sale of Daewoo 
Shipbuilding: Korea Development Bank (KDB) on January 21 
terminated its agreement with Hanwha Group, which had been 
set to purchase a majority holding in Daewoo Shipbuilding & 
Marine Engineering (DSME), the world's third largest 
shipbuilder.  The announcement follows three months of 
wrangling between the two parties over the proposed USD 4.9 
billion acquisition. Hanwha was expected to pay for DSME by 
the end of March, but as the economic downturn became more 
severe, Korea's ninth-largest conglomerate found the 
financing of the deal more difficult than expected.  In 
December, Hanwha asked KDB to delay the deal or accept 
payment in installments. At that point, the bank provided one 
more month for Hanwha to find the cash for the 50.4% stake, 
suggesting that the money could be raised from the sale of 
other Hanwha assets.  In its official statement after the 
collapse of the deal, Hanwha said that it was unable to even 
start due diligence on DSME due to protests by the 
shipbuilder's employees over the terms of the deal.  Hanwha 
has paid a $220 million deposit and KDB plans to keep it. A 
lengthy legal dispute is expected. 
STEPHENS