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UNCLAS SECTION 01 OF 03 SEOUL 001092 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - JUNE 2009 
 
¶1. (U) This cable is sensitive but unclassified and not/not intended 
for Internet distribution. 
 
------------- 
In This Issue 
------------- 
 
-- ROKG to Invest 24.5 Trillion Won in 17 New Growth Engines 
-- Current Account Surplus of USD 4.28 Billion in April 
-- Business Sentiment Recovering in May 
-- Manufacturing Production Continues Recovery in April 
-- ROKG Spends Over Half of 2009 Budget in First Five Months 
-- Corporate Sales Revenue Falls 0.6 percent in Q1 
-- Gross National Income Declines in Q1 
-- Foreign Currency Reserves Reach USD 226.8 Billion 
-- MOSF Cautious on Outlook Based on Mixed Indicators 
-- BIS Capital Ratio of Domestic Banks Rises in March 
-- 33 Companies to Be Restructured 
-- BOK Keeps Benchmark Interest Rates at 2 percent 
-- Domestic Insurers Post Net Profit in FY2008 
 
---------------- 
Domestic Economy 
---------------- 
 
ROKG to Invest 24.5 Trillion Won 
in 17 New Growth Engines 
-------------------------------- 
 
¶2. (SBU) The Korean government announced in May plans to invest 24.5 
trillion won (USD 19.5 billion) over the next five years in 17 
industries that would serve as new growth engines for the country. 
They were classified into three main sectors: green technology (6.7 
trillion won or USD 5.3 billion), cutting-edge convergence (12.2 
trillion won or USD 9.6 billion) and higher value-added services 
(5.5 trillion won or USD 4.3 billion).  As part of this plan, the 
government intends to train a core workforce of 700,000 during the 
next 10 years and will create 300 small and medium-sized enterprises 
(SMEs) by 2013. 
 
Current Account Surplus of 
USD 4.28 Billion in April 
-------------------------- 
 
¶3. (SBU) The Bank of Korea (BOK) stated that the current account 
surplus was USD 4.28 billion in April, down from USD 6.65 billion in 
March.  Korea has been running a current account surplus for three 
consecutive months but the size of the surplus shrank in April as 
the Korean won strengthened against the dollar and domestic firms 
paid out greater dividend payments to overseas investors. The goods 
account posted a surplus of USD 6.17 billion in April, down from USD 
6.98 billion in March as imports fell faster than exports. 
Customs-cleared exports fell 22.6 percent from a year ago and 
imports plunged 35.7 percent from a year ago as well.  The services 
account deficit increased to USD 1.11 billion in April, up from a 
deficit of USD 650 million in March.  The income account deficit, 
which tracks wages for foreign workers and dividend payments abroad, 
surged to USD 860 million in April from USD 220 million in March 
(domestic firms usually pay foreign shareholders dividends in this 
period). 
 
Business Sentiment Recovering in May 
------------------------------------ 
 
¶4. (SBU) The BOK announced that the business survey index (BSI) of 
manufacturers was 74 in May, up five points from 69 in April.  The 
BSI has increased for three consecutive months since bottoming out 
at 43 in February and is the highest since 75 in August 2008. 
Moreover, the Korea Chamber of Commerce and Industry forecasts the 
BSI for the third quarter to be 110, surpassing the benchmark index 
of 100 for the first time since the fourth quarter of 2007.  An 
index higher than 100 indicates that there are more businesses 
optimistic than not about the economy in the upcoming quarter. 
 
Manufacturing Production Continues 
Recovery in April 
---------------------------------- 
 
SEOUL 00001092  002 OF 003 
 
 
 
¶5. (SBU) According to the National Statistical Office (NSO), 
industrial production in April fell 8.2 percent from the same month 
last year due to a decline in automobile, primary metal, and 
machinery device production but rose 2.6 percent from March, 
increasing for the fourth consecutive month.  However, the 
month-on-month increase slowed from 7.1 percent in February. 
Meanwhile, the index of coincident macroeconomic indicators, which 
measures current business conditions, rose 1.5 percent and the index 
of leading macroeconomic indicators, which forecasts future business 
conditions, rose 1.6 percent in April from March. 
 
ROKG Spends Over Half of 
2009 Budget in First Five Months 
-------------------------------- 
 
¶6. (SBU) The Korean government spent 132.9 trillion won (USD 104.4 
billion), or 51.6 percent of the 257.7 trillion won (USD 202.4 
billion) budget for 2009 through the end of May.  The government 
spent 13.2 trillion won (USD 10.4 billion) more than 119.7 trillion 
won (USD 94 billion) intended for the first five months of the year 
due to increased fiscal spending and expansionary policies to 
stimulate economic recovery. The government plans to spend 156.1 
trillion won (USD 122.6 billion) in the first half of the year and 
only 101.6 trillion won (USD 79.8 billion) in the second half.  This 
has led some experts to warn that the government's economic stimulus 
plan may soon run out of steam. 
 
Corporate Sales Revenue Falls 0.6 Percent in Q1 
--------------------------------------------- 
 
¶7. (SBU) Based on a BOK survey of 1,534 companies, total sales 
revenue in the first quarter fell to 247 trillion won (USD 194 
billion), 0.6 percent lower than the previous year and the first 
decline since the third quarter of 2003.  Revenue for the 
manufacturing industry fell by 3.8 percent, the first decline since 
data collection began in 2003.  However, revenue for the 
non-manufacturing industry rose 4.9 percent.  The financial health 
of companies has sharply worsened.  The aggregate debt-to-equity 
ratio rose 7.9 percentage points to 116.2 percent since the end of 
2008 through the first quarter of 2009, reaching levels that haven't 
been seen since the first quarter of 2003. 
 
Gross National Income Declines in Q1 
------------------------------------ 
 
¶8. (SBU) The BOK announced that real gross national income (GNI) for 
the first quarter shrank 0.2 percent from the previous quarter and 
4.7 percent from a year ago, falling for the third consecutive 
quarter.  Gross domestic product (GDP) for the first quarter rose 
0.05 percent from the previous quarter due to increased government 
spending and interest rate reductions.  However, GDP fell 4.2 
percent from a year ago, the largest year-on-year change since the 6 
percent contraction in the fourth quarter of 1998.  Due to the 
global economic downturn, GDP declined 3.4 percent from the previous 
year in the fourth quarter of 2008. 
 
Foreign Currency Reserves Reach USD 226.8 Billion 
--------------------------------------------- ---- 
 
¶9. (SBU) The BOK announced that Korea's foreign currency reserves 
reached USD 226.8 billion at the end of May, up USD 14.3 billion 
from USD 212.5 billion at the end of April.  This was the steepest 
monthly rise since 1998.  This increase was mainly due to an 
increase in operating profits of the foreign reserves, redemptions 
at maturity of the foreign currency liquidity supplied by the BOK 
and the Foreign Exchange Stabilization Fund, and increases in the 
value of non-dollar assets when converted into US currency terms. 
The reserve has swelled by a total of USD 25.2 billion from the end 
of February through the end of May after significant declines in the 
second half of 2008. 
 
------------------------------- 
Finance and Structural Policies 
------------------------------- 
 
MOSF Cautious on Outlook Based on Mixed Indicators 
--------------------------------------------- ----- 
 
SEOUL 00001092  003 OF 003 
 
 
 
¶10. (SBU) According to the Ministry of Strategy and Finance (MOSF), 
domestic credit card purchases rose 8.7 percent year-on-year in May, 
indicating improved consumer confidence.  Sales revenue for 
department stores and large discount stores rose 5.4 percent and 1.7 
percent, respectively.  However, the MOSF remained cautious in light 
of sluggish economic indicators such as domestic demand, exports, 
employment, and investment in new facilities.  In the first quarter 
of 2009, facility investment fell 22.1 percent from a year earlier 
and 9.6 percent from the previous quarter. 
 
BIS Capital Ratio of Domestic Banks Rises in March 
--------------------------------------------- ----- 
 
¶11. (SBU) The Bank for International Settlements (BIS) capital ratio 
of domestic banks under the Basel II framework went up to an average 
of 12.94 percent as of March 31, 2009 from 12.31 percent at the end 
of last year.  The Tier 1 capital (book value of a bank's stock plus 
retained savings) ratio of banks also rose from 8.84 percent to 9.51 
percent over the same period.  The rise was attributed to the banks' 
capital expansion and decreased risk-weighted assets.  During the 
first quarter of  2009, the capital of domestic banks increased by 
6.9 trillion won (USD 5.4 billion) or 4.7 percent through issuances 
of stocks and hybrid capital instruments totaling 7.5 trillion won 
(USD 5.9 billion). This figure includes the purchase of 3.95 
trillion won (USD 3.1 billion) by the Bank Recapitalization Fund and 
gains from net income. 
 
33 Companies to Be Restructured 
------------------------------- 
 
¶12. (SBU) The Financial Services Commission (FSC) announced that 
Korea's 18 creditor banks have chosen 33 companies for corporate 
restructuring after conducting a regular credit risk assessment of 
433 companies, each with more than 50 billion won (USD 39.3 million) 
in debt to financial institutions.  Out of these 33 companies, 22 
companies rated as C grade will be subjected to refinancing and debt 
rescheduling programs led by creditor banks.  The 11 companies that 
rated as D-grade will be cut off from fresh loans and will have to 
find ways to stay afloat on their own. The creditors have conducted 
credit risk assessments since April in efforts to weed out weak 
manufacturers and will continue their reviews of small and 
medium-sized enterprises (SMEs) this month. 
 
BOK Keeps the Benchmark Interest Rates at 2 Percent 
--------------------------------------------- ------ 
 
¶13. (SBU) The BOK Monetary Policy Committee decided to keep the 
benchmark interest rate at 2 percent in June, freezing the rate for 
the fourth consecutive month.  The BOK and the South Korean 
government did not see the need to raise interest rates which could 
hinder economic recovery efforts.  At a press conference immediately 
following the meeting, BOK Governor Lee Seong-Tae said, "owing to an 
aggressive economic stimulus package, production activities improved 
significantly and the domestic demand slump eased, indicating that 
the economy has nearly bottomed out." However, he later noted that 
huge uncertainties still remain. 
 
Domestic Insurers Post Net Profit in FY2008 
------------------------------------------- 
 
¶14. (SBU) The Financial Supervisory Service (FSS) said 22 life 
insurance companies posted a total net profit of 617.2 billion won 
(USD 485.2 million) in the fiscal year 2008 (April 2008 to March 
2009), down 70.7 percent from the previous year.  During the same 
period, 29 liability insurance companies earned 1.31 trillion won 
(USD 1 billion) in net profit, down 21.8 percent from the previous 
year.  The solvency ratio (net assets to liability reserve or 
appropriate surplus), which indicates the financial health of 
insurance companies, was 216.3 percent for life insurance companies, 
falling 20.8 percentage points from a year ago, and 275.5 percent 
for non-life insurance companies, dropping 13.2 percentage points. 
 
STEPHENS