VZCZCXRO7663
RR RUEHVK
DE RUEHUL #1177/01 2090016
ZNR UUUUU ZZH
R 280016Z JUL 09
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC 5123
RUCPDOC/USDOC WASHDC 8910
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEAUSA/DEPT OF HHS WASHDC
RHEHNSC/NSC WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 6428
RUEHBJ/AMEMBASSY BEIJING 6342
RUEHGP/AMEMBASSY SINGAPORE 6946
RUEHHK/AMCONSUL HONG KONG 3938
RUEHSH/AMCONSUL SHENYANG 4781
RUEHVK/AMCONSUL VLADIVOSTOK 1673
RUEHIN/AIT TAIPEI 3754

UNCLAS SECTION 01 OF 03 SEOUL 001177 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - JULY 2009 
 
¶1. (U) This cable is sensitive but unclassified and not/not intended 
for Internet distribution. 
 
------------- 
In This Issue 
------------- 
 
-- South Korea's GDP Ranking Falls to Fifteenth Highest 
-- Inflation Rate Slows to 2 Percent in June 
-- Producer Prices Fall in June 
-- Trade Surplus Reaches USD 21.1 Billion in First Half 
-- National Growth Potential Drops by One Percent in 2009 
-- ROKG's Budget to Contract Sharply in Second Half 
-- Foreign Currency Reserves Rise to USD 231.7 Billion 
-- IMF and OECD Revise Forecasts of ROK GDP for 2009 and 2010 
-- BOK and ROKG Predict Faster Economic Recovery in Second Half 
-- ROKG Picks 26 Projects for New Growth Engines 
-- Korean Firms to Increase Investments in Second Half 
-- ROKG to Create Facility Investment Fund 
-- U.S. FED and BOK Agree to Extend the Currency Swap Agreement 
-- BOK Freezes Benchmark Interest Rates at 2 Percent 
 
 
Domestic Economy 
---------------- 
 
¶1. (SBU) South Korea's GDP Ranking Falls to Fifteenth Highest World: 
 Bank data released in July showed that Korea's nominal Gross 
Domestic Product (GDP) totaled USD 929.1 billion in 2008, falling to 
fifteenth highest from fourteenth in 2007 in the World Bank's GDP 
ranking of 186 countries.  Korea was ranked eleventh highest in 2003 
but has been surpassed by India, Brazil, Russia, and Australia. 
Korea's nominal gross national income (GNI) ranking was unchanged at 
14th place with USD 1.05 trillion.  Korea's GDP is expected to grow 
with economic recovery in 2010. 
 
¶2. (SBU) Inflation Rate Slows to 2 Percent in June:  According to 
the National Statistical Office (NSO), consumer prices rose 2.0 
percent in June from a year earlier, recording the slowest yearly 
growth since August 2007.  The slowdown in consumer price growth is 
attributed to the lower prices of oil and other raw materials. 
Consumer prices fell 0.1 percent in June from May.  Prices of 
agricultural and fishery products tumbled 4.8 percent from May due 
to an increase in supply. 
 
¶3. (SBU) Producer Prices Fall in June:  The Bank of Korea (BOK) 
reported that producer prices fell 0.3 percent in June for the 
second consecutive month.  Prices of agricultural, forestry, and 
fishery products fell the most, tumbling 9.6 percent in June. 
Producer prices fell 3.1 percent from a year earlier as a result of 
lower oil prices and stagnant domestic demand.  Producer prices are 
a leading indicator of future consumer price growth. 
 
¶4. (SBU) Trade Surplus Reaches USD 21.1 Billion in First Half: 
According to the Korea Customs Service (KCS), the trade surplus for 
the first half of this year was USD 21.1 billion. This was a record 
surplus as imports decreased faster than exports.  Exports fell 22.6 
percent, year-on-year to USD 165.7 billion and imports tumbled 34.5 
percent to USD 144.6 billion. The KCS attributed the steep decline 
in imports this year to lower oil prices. 
 
(Unit: USD million) 
           Jun-08   Jun-09   Change(%)   H1 08   H1 09   Change(%) 
TRADE 
BALANCE      -569     7,270              -6,909   21,096 
Total Exports 
           37,259    32,634   -12.4     213,937  165,668   -22.6 
--Home Appliances 
              450       882    96.0       2,777    4,802    72.9 
--Vessels and etc. 
            2,823     5,065    79.4      18,069    3,805    31.7 
--Others   33,986    26,687   -21.5     193,091  137,061   -29.0 
Total Imports 
           37,828    25,364   -32.9     220,846  144,572   -34.5 
--Oils      8,386     3,748   -55.3      44,142   20,592   -53.4 
--Iron and 
    Steel   3,229     1,506   -53.4      17,468   10,013   -42.7 
 
SEOUL 00001177  002 OF 003 
 
 
--Others   26,213    20,110   -23.3     159,236  113,967   -28.4 
 
(Source: Korea Customs Service) 
 
¶5. (SBU) National Growth Potential Drops by One Percent in 2009:  In 
a press meeting on July 14, Director General Yoon Jong-won, head of 
the Economic Policy Bureau of the MOSF, revealed that Korea's 
potential growth rate may drop by about one percentage point to the 
3 to 4 percent range this year.  He also said, "The potential growth 
rate is expected to improve slowly from the end of next year but the 
pace of recovery will depend on efforts in investment and 
employment."  Korea Development Institute, Samsung Economic Research 
Institute and other think tanks also warned of Korea's growth 
potential weakening further as a result of sluggish investment and 
productivity this year. 
 
¶6. (SBU) ROKG's Budget to Contract Sharply in Second Half:  The MOSF 
reported that the government has spent 160.8 trillion won (USD 123.7 
billion) of its original and supplementary budgets during the first 
half of 2009, with only 111.9 trillion won (USD 86.1 billion) 
remaining for the second half.  MOSF plans to scale back government 
spending in the long-term but will maintain its current expansionary 
fiscal policy to bolster economic recovery.  While some experts warn 
that the fiscal stimulus will run out steam in the remaining six 
months of the year, others, more concerned with inflationary risks, 
are pleased that ROKG spending will begin to taper off in the second 
half. 
 
¶7. (SBU) Foreign Currency Reserves Rise to USD 231.7 Billion:  The 
BOK announced that Korea's foreign currency reserves reached USD 
231.73 billion at of the end of June.  Foreign reserves swelled USD 
4.96 billion during the month and recorded the largest amount since 
the end of September 2008 (USD 239.67 billion).  During the first 
half of the year, the reserves increased USD 30.51 billion, a record 
high for a six month period.  The central bank forecasts foreign 
currency reserves to continue growing as the current account surplus 
is expected to continue. 
 
Finance and Structural Policies 
------------------------------- 
 
¶8. (SBU) IMF and OECD Revise Forecasts of ROK GDP for 2009 and 
2010The International Monetary Fund (IMF) on July 7 released its 
most recent forecast, calling for the Korean economy to contract 3 
percent in 2009 and grow 2.5 percent in 2010.  It raised the 
forecast for each year by one percentage point from its previous 
projection.  "Thanks to the Korean government's comprehensive and 
swift fiscal, monetary and financial policies, the Korean economy 
has bottomed out and wisely avoided a liquidity crisis and credit 
crunch," the IMF said.  The IMF sees economic growth continuing but 
slowly in 2010 and recommended Korea to continue its current 
expansionary policy through 2010.  Meanwhile, the Organization for 
Economic Cooperation and Development (OECD) released its outlook on 
June 24 forecasting that Korea's GDP will contract 2.2 percent in 
2009 and grow 3.5 percent in 2010, the best performance among OECD 
member countries.  The OECD composite leading indicator (CLI) for 
Korea rose to 99.8 in May, up 2.2 points from 97.6 in April.  It was 
the sixth consecutive increase since posting 90.2 in November 2008. 
 
 
¶9. (SBU) BOK and ROKG Predict Faster Economic Recovery in Second 
Half:  The BOK forecasts the economy to grow 0.2 percent in the 
second half of 2009 from a year earlier.  It revised its projection 
of a 0.6 percent contraction in April as the economy shows signs of 
increase in domestic and overseas demand.  The economy shrank 3.4 
percent in the first half of the year as the BOK expected.   The BOK 
also revised its projection upward for the economy to contract 1.6 
percent in 2009 from a 2.4 percent contraction in April.  The 
economy is expected to grow 3.6 percent in 2010 as the global 
economy recovers and domestic and overseas demand increase.  It is 
the most optimistic outlook for 2010 thus far.  On June 25, the MOSF 
raised its GDP forecast for 2009 to a 1.5 percent contraction from 
its previous projection in April of a 2 percent contraction.  Strong 
performances in the mining, manufacturing, electric, and gas 
industries are expected to boost economic growth in the second 
half. 
 
¶10. (SBU) ROKG Picks 26 Projects for New Growth Engines:  The 
 
SEOUL 00001177  003 OF 003 
 
 
Ministry of Knowledge Economy (MKE) announced 26 smart projects in 
new growth engines.  The government will finance the research and 
development of these projects which will be taken on by both large 
conglomerates and several small and medium-sized enterprises (SMEs). 
 A total of 155 billion won (USD 119 million) will fund projects in 
eight major fields including biopharmaceuticals (USD 23 million), 
environmentally-friendly cars (USD 23 million), light-emitting diode 
(LED) applications (USD 19 million), system semiconductors (USD 18 
million), and robotic applications (USD 8 million).  A consortium 
led by Samsung Electronics was designated for a biopharmaceutical 
project. 
 
¶11. (SBU) Korean Firms to Increase Investments in Second Half:  The 
Korea Chamber of Commerce and Industry (KCCI) conducted a survey on 
facility investment plans of 1,000 domestic companies for the second 
half of 2009.  The survey revealed that companies plan to increase 
their investment in facilities by an average of 3.0 percent in the 
second half of the year.  Facility investment fell 7.9 percent 
year-on-year in the first half of the year as a result of the 
economic and financial crisis.  Factors behind the 
increase in investment are: production of new products and 
technological development (24.0 percent), preparation for the future 
(23.6 percent), improvement in aging facilities (18.3 percent), and 
recovery of domestic demand or exports (17.1 percent).  Companies in 
the electric power and gas sector accounted for the largest portion 
(11.1 percent) of those planning investment. 
 
¶12. (SBU) ROKG to Create a Facility Investment Fund:  At a meeting 
between President Lee Myung-bak and corporate CEOs, the government 
revealed its plans to stimulate business investment and job 
creation.  The government plans to establish 
a 10 trillion won (USD 7.6 billion) facility investment fund.  It 
plans to use 5 trillion won (USD 3.8 billion) in lending from the 
Korean Development Bank (KDB), the Industrial Bank of Korea (IBK), 
and the National Pension Service (NPS) by August and another 5 
trillion won (USD 3.8 billion) from KDB and IBK at a later time.  In 
addition, the government plans to increase tax credits for R&D 
investments in new growth engines and core technologies.  Large 
companies may be able to deduct up to 25 percent of R&D investment 
in core technologies from taxable earnings, while small companies 
may be able to deduct up to 35 percent. 
 
13 (SBU) U.S. Fed and BOK Agree to Extend the Currency Swap 
Agreement:  On June 26, the U.S. Federal Reserve announced a 
three-month extension of its currency swap agreement with the BOK to 
February 1, 2010.  "The BOK expects that this action of extending 
its swap agreement with the Federal Reserve will contribute to the 
continuing stability of the foreign currency funding market in 
Korea," said a BOK official. 
 
¶14. (SBU) BOK Freezes Benchmark Interest Rates at 2 Percent:  The 
BOK Monetary Policy Committee on July 9 decided to freeze the 
benchmark interest rate at an annual level of 2.0 percent as 
expected.  Consumption and investment are still weak and 
uncertainties regarding economic growth in the second half of the 
year remain.  BOK Governor Lee Seong-tae expects economic recovery 
to be slow in the second half.  The benchmark interest rate was cut 
from 5.25 percent to 2.0 percent between October 2008 and February 
this year.  The rate has been left unchanged for five consecutive 
months to boost economic recovery. 
 
STEPHENS