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UNCLAS SECTION 01 OF 03 SEOUL 000780 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - APRIL 2009 
 
------------- 
In This Issue 
------------- 
 
-- Manufacturers' Confidence Posts Largest Gain since 2003 
-- February Industrial Output Weak but Higher than in January 
-- Korea Successfully Issues Foreign Currency Bonds of USD 3 
Billion 
-- Current Account Posts USD 3.68 Billion Surplus in February after 
January Deficit 
-- Foreign Exchange Reserves Increase to USD 206 Billion in March 
-- Job Losses Surge to 142,000 in February, Pushing Unemployment to 
3.9 Percent 
-- Domestic Delinquency Ratios Rising through February, especially 
for SMEs 
-- Restructuring of Shipping Companies Begins with Bank Assessments 
-- Second Round Assessment Results for Construction Firms and 
Shipbuilders 
-- BOK Reduces Forex Auction by USD 1 Billion, Reducing Fed Swaps to 
USD 15 Billion 
-- BOK Holds Key Rate Steady at Two Percent 
-- More Korean Companies Borrow Overseas 
-- Household Credit Delinquency Program 
 
---------------- 
Domestic Economy 
---------------- 
 
¶1. (U) Manufacturers' Confidence Posts Largest Gain since 2003: 
Manufacturers' confidence for April rose as more companies expressed 
optimism over eased woes in the financial market and the expected 
effects of the government's stimulus package, the central bank said 
on March 31.  The business survey index (BSI) of manufacturers' 
expectations rose to 60 for April from 50 in March.  Meanwhile, the 
BSI for manufacturers' current business sentiment climbed to 57 in 
March, compared with 43 the previous month, marking the largest 
monthly gain since January 2003 when the central bank began to 
compile related data.  The nationwide survey of 2,929 companies was 
conducted March 16-23. 
 
¶2. (U) February Industrial Output Weak but Higher than in January: 
Industrial output in February fell at a slower pace than in January. 
 The National Statistical Office (NSO) said on March 31 that 
industrial production contracted 10.3 percent in February from a 
year earlier, down from January's 25.5 percent fall, which was the 
worst performance since 1970.  Adjusted seasonally and viewed on a 
month-to-month basis, however, production rose 6.8 percent, leading 
some analysts to conclude that the worst might be over for the 
Korean economy.  The production of semiconductors and automobiles, 
two of Korea's major export items, increased 18.4 percent and 18.9 
percent, respectively, from January levels.  Inventories fell 4.5 
percent from a month earlier, with factories operating at an average 
of 66.7 percent of capacity, up from 61.4 percent.  The services 
sector output rose 1.2 percent from a month earlier.  Seasonally 
adjusted retail sales jumped 5 percent.  On the other hand, 
corporate facility spending on machinery and telecommunications fell 
5.4 percent in February. 
 
¶3. (U) Korea Successfully Issues Foreign Currency Bonds of USD 3 
Billion:  The Ministry of Strategy and Finance confirmed on April 9 
the government raised a total of USD 3 billion abroad by 
successfully selling dollar-denominated state bonds, a move that is 
expected to pave the way for local banks and companies to secure 
foreign currency.  After the announcement of the successful bond 
issuance, local financial markets jumped sharply higher and the 
Korean won appreciated against the U.S. dollar.  The USD 1.5 billion 
five-year foreign currency stabilization bonds were priced at a 
yield on the U.S.  Treasury plus 400 basis points, while the USD 1.5 
billion 10-year bonds were priced at 437.5 basis points over the 
U.S. Treasury rate.  The size of the global bond sale was increased 
to USD 3 billion from an initial plan of USD 2 billion due to 
swelling demand by investors from the U.S., Europe and Asia, the 
ministry said, noting the order book surpassed USD 8 billion.  The 
bond sale was led by six financial institutions chosen by the ROKG: 
Samsung Securities, Deutsche Bank, Goldman Sachs, Merrill Lynch, 
Citigroup and Credit Suisse Group.  This was the first state bond 
issuance since November 2006, when the ROKG issued USD 1 billion in 
foreign currency stabilization bonds.  The government plans to raise 
an additional USD 3 billion overseas by the end of the year, 
according to the ministry. 
 
SEOUL 00000780  002 OF 003 
 
 
 
¶4. (U) Current Account Posts USD 3.68 Billion Surplus in February: 
South Korea's current account in February shifted to a surplus of 
USD 3.68 billion from the previous month's USD 1.64 billion deficit, 
as the goods account swung to surplus and the travel and current 
transfers account surplus widened.  The goods account shifted from 
January's USD 1.74 billion deficit to a surplus of USD 3.15 billion, 
as imports shrank by more than exports.  The central bank predicted 
on March 30 that the country is likely to see a considerable current 
account surplus for March as the trade surplus will be sizable and 
dividend payouts by local firms to foreign investors will be 
limited. 
 
¶5. (U) Foreign Exchange Reserves Increase to USD 206 Billion in 
March:  Korea's official foreign reserves as of the end of March 
2009 amounted to 206.3 billion dollars, up USD 4.8 billion dollars 
from previous month USD 201.5 billion.  The increase was mainly 
attributable to a sharp rise in operating profits on the foreign 
reserves, to a decrease in the value of the U.S. dollar (increasing 
the dollar value of non-dollar denominated assets in the reserves); 
and to redemptions at maturity by the National Pension Service of 
its currency swaps agreement with the Bank of Korea (USD 500 
million). 
 
¶6. (U) Job Losses Surge to 142,000 in February, Pushing Unemployment 
to 3.9 Percent:  Korea lost more jobs than it generated in February 
for the third consecutive month, with worsening labor market 
conditions hitting university graduates particularly hard. 
According to the National Statistical Office (NSO), 142,000 jobs 
disappeared in February after net slides of 103,000 in January and 
12,000 in December last year.  February marks the largest 
year-on-year job loss since September 2003, when the nation lost 
189,000 jobs in the aftermath of the bursting of a credit card 
bubble.  Compared to a year ago, the February unemployment rate rose 
from 3.5 to 3.9 percent and the jobless rate among people aged 15-29 
reached 8.7 percent from 7.3 percent.  The Lee Myung-bak 
administration has been forced to abandon its pledge inaugural 
pledge to create 350,000 new jobs in 2009. 
 
 
------------------------------- 
Finance and Structural Policies 
------------------------------- 
 
¶7. (U) Domestic Delinquency Ratios Rising through February, 
especially for SMEs:  The preliminary delinquency ratio for 
won-denominated bank loans as of the beginning of March was 1.67 
percent, up 0.66 percentage points from the same period a year 
earlier.  The delinquency ratio for corporate loans increased to 
2.31 percent, up 1.06 percentage points from February of last year. 
The driver of the trend is that the SME delinquency ratio increased 
to 2.67 percent, up 1.27 percentage points from a year earlier.  The 
delinquency ratio for household loans stood at 0.89 percent, up 0.13 
percentage point from a year earlier, due to the economic downturn. 
The overall picture is positive compared to other economies but 
nonetheless shows some deterioration in the soundness of the assets 
of commercial banks. 
 
¶8. (U) Restructuring of Shipping Companies Begins with Bank 
Assessments:  In line with the existing corporate restructuring 
procedures, creditor banks began in March to conduct credit risk 
assessments of shipping companies.  Shipping has been hit hard by 
the global economic slowdown and is the third sector (after 
construction and shipbuilding, see below) to undergo a corporate 
restructuring review by the creditors.  To facilitate the 
restructuring process, ROKG financial authorities advised creditor 
banks to complete risk assessments by early May for shipping 
companies.  Based on the result of the assessment, creditor banks 
will decide on ways to support the restructuring plans devised by 
either creditor banks or the companies themselves.  The government 
will take further regulatory steps to enhance the transparency and 
operational efficiency of the process. 
 
¶9. (U) Second Round Assessment Results for Construction Firms and 
Shipbuilders:  Following the second round of credit risk assessment, 
the major creditors of construction and shipbuilding companies on 
March 27 announced that 20 additional companies would undergo 
corporate debt workout programs intended to prevent an accumulation 
of credit problems for firms facing cash flow issues.  Out of the 74 
companies that were reviewed, 27 percent were selected for 
 
SEOUL 00000780  003 OF 003 
 
 
restructuring, higher than the 14.3 percent chosen in the first 
round.  The higher figure has partially mollified critics charging 
that the restructuring program failed to address many serious credit 
risks in the affected sectors.  On the other hand, the companies 
chosen in the second round are smaller and leave the banks less 
exposed.  Analysts have estimated that 196 billion won (USD 148 
million) in additional loan loss provisions will be required in this 
second round.  Banks account for 112 billion won (USD 85 million), 
savings banks for 65 billion (USD 49 million), and other 
institutions for 19 billion won (USD14 million) of this credit 
exposure.  As of end-February 2009, creditors' exposure in the 20 
selected companies was 1.6 trillion won (USD 1.2 billion) or 17.2% 
of the 9.2 trillion won (USD 6.97 billion) in total exposure in the 
74 companies reviewed in the second round. 
 
¶10. (U) BOK Reduces Forex Auction by USD 1 Billion, Reducing Fed 
Swaps to USD 15 Billion:  Reflecting the improved foreign currency 
liquidity situation in commercial banks, the Bank of Korea (BOK) 
auctioned only USD 2 billion out of USD 3 billion in loans maturing 
on April 9.  The central bank justified the action based on the 
expectation that the current account would remain in surplus in 
April and that market conditions for domestic banks would remain 
favorable.  By reducing the amount of the auction by USD 1 billion, 
the BOK reduced the amount drawn against the Fed-BOK currency swap 
to just USD 15 billion. 
 
¶11. (U) BOK Holds Key Rate Steady at Two Percent:  In a monthly 
policy meeting on April 9, the Bank of Korea (BOK) again held the 
benchmark seven-day repo rate steady at a record low of two percent 
for April.  Between October and February, the BOK had trimmed the 
rate by 3.25 percentage points from 5.25 percent.  In announcing the 
decision, the BOK said the economy is still falling but 
contractionary pressure has decreased since the end of February, 
e.g., through the stabilization of exports and improvement in the 
current account.  The central bank also said it would raise the cap 
on its low-rate loans to commercial lenders to 10 trillion won (USD 
7.6 billion) from the current 9 trillion won (USD6.8 billion).  The 
loans, which commercial banks then re-lend solely to small and 
medium enterprises, carry an annual interest of 1.25 percent. 
 
¶12. (U) More Korean Companies Borrow Overseas:  With increased 
global liquidity, more Korean firms are trying to expand foreign 
fund-raising.  Korea Gas, the world's largest liquefied natural gas 
buyer, is considering selling USD 500 million in bonds this year. 
State-run Korea Electric is seeking to borrow USD 600 million. 
Korea National Oil Corp., the state- run oil developer, is seeking 
USD 1.7 billion from overseas this year.  State-run lenders Korea 
Development Bank and Export-Import Bank of Korea sold USD 4 billion 
of global bonds in January.  Korean steelmaker POSCO borrowed USD 
700 million on March 19.  Hana Bank and competitor Woori Bank 
borrowed USD 1 billion and USD 300 million, respectively, on April 2 
and April 6. 
 
¶13. (U) Household Credit Delinquency Program:  The Financial 
Supervisory Service (FSS) announced on March 10 that the Credit 
Counseling and Recovery Service (CCRS) and creditor institutions 
will run a "Pre-Workout Program," in support of individual borrowers 
who are between one and three months delinquent.  This is a 
preemptive step against further increase of household delinquency 
and began on April 13 for a one-year period.  An applicant must 
satisfy three criteria: total debt of under 500 million won (USD 
379,000); the delinquency is 30-90 days in length; and, the ratio of 
new credit to total existing debts (30% maximum). 
 
STANTON