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DE RUEHUL #1402/01 2450219
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RUCPDOC/USDOC WASHDC 9103
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RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
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RUEHBJ/AMEMBASSY BEIJING 6576
RUEHGP/AMEMBASSY SINGAPORE 7159
RUEHHK/AMCONSUL HONG KONG 3987
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RUEHIN/AIT TAIPEI 3943

UNCLAS SECTION 01 OF 03 SEOUL 001402 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - AUGUST 2009 
 
¶1. (U) This cable is sensitive but unclassified and not/not intended 
for Internet distribution. 
 
------------- 
In This Issue 
------------- 
 
-- Producer Prices Reverse Course, Rise on Monthly Basis 
-- July Consumer Inflation Slowed 
-- Household Debt Risks Expected to Rise 
-- FX Reserves Continue to Rise in July 
-- Facility Investment Down 20 Percent in H1 
-- Expansionary Macro Policy until Economic Recovery Clear 
-- Industrial Production Posts Six-Month Increase 
-- Korea to Become Net Creditor Soon 
-- Capital Inflow by Ethnic Koreans Triples 
-- IMF Raises Forecast for the Korean Economy 
-- ADB Predicts V-Shaped Economic Recovery for Korea 
-- BOK Keeps Interest Rate at Two Percent 
-- Foreign Currency Deposits Rise to Record High 
-- Domestic Banks' Profit Rebounded in Q2 
-- ROKG Tightens Banks' Bad Loans 
-- Domestic Banks' Foreign Borrowing Nearly Triples in H1 
 
 
Domestic Economy 
---------------- 
 
¶2. (SBU) Producer Prices Reverse Course, Rise on Monthly Basis:  The 
Bank of Korea (BOK) said that producer prices for July rose 1.2 
percent from June, the highest monthly jump since July 2008.  Prices 
for agriculture/forestry/fisheries products rose 5.7 percent from 
the previous month and those for electricity/water/gas increased 5.3 
percent for the same period.  Industrial products rose 0.9 percent 
and the service sector edged up 0.3 percent.  These producer prices, 
however, fell 3.8 percent from a year earlier, marking a third 
consecutive year-on-year decline on a monthly basis. 
 
¶3. (SBU) July Consumer Inflation Slowed:  According to the National 
Statistical Office (NSO), consumer prices in July rose 1.6 percent 
from a year earlier (up 0.4 percent from the previous month), 
posting the smallest year-on-year gain since May 2000 (1.1 percent), 
due to a combination of the base effect (from a 5.9 percent rise in 
July 2008), stability in foreign exchange rates and sluggish private 
consumption.  The NSO forecasts that future consumer prices will 
show overall stability but may edge up slightly as raw material 
prices increase along with a recovery of the economy. 
 
¶4. (SBU) Household Debt Risks Expected to Rise:  Samsung Economic 
Research Institute (SERI), a leading private think tank, said the 
risks from household debt may approach a record high.  SERI senior 
researcher Jeong Young-sik said households face great risk as 
demonstrated by the Household Credit Risk Index (HCRI), which 
attempts to measure the risk of real estate default by homeowners. 
The HCRI, which is created by SERI, usually lies below 1 but climbs 
above the benchmark when household debt becomes hazardous.  For 
example, in the first quarter of 2003, the index reached 1.63 as a 
credit card bubble burst.  The index got back on track as the 
economy stabilized before surging to 1.48 over the fourth quarter of 
2008 during the global financial crisis.  The HRCI dropped to 0.33 
in the first quarter of this year and 0.59 in the second quarter as 
interest rates were low but the figure could move as high as 1.56 by 
the end of this year, Jeong said. 
 
¶5. (SBU) FX Reserves Continue to Rise in July:  With continuing 
current account surpluses and the absorption of foreign currency 
liquidity by the government, Korea's FX reserves swelled by USD 5.78 
billion from a month earlier to USD 237.51 billion at the end of 
July, the BOK announced.  After a fifth consecutive monthly rise in 
FX reserves in July, attention has been focused on whether the 
record high of USD 264.25 billion set at the end of March 2008 will 
be surpassed within the year.  Private research institutes expect 
that the FX reserve will continue to increase in the second half of 
this year. 
 
¶6. (SBU) Facility Investment Down 20 Percent in H1:  The BOK 
reported that facility investment amounted to 37.71 trillion won 
 
SEOUL 00001402  002.2 OF 003 
 
 
(USD 29.9 billion) in the first half, shrinking 9.56 trillion won 
(USD 7.6 billion), or 20.2 percent from a year earlier and marking 
the largest decline since the Asian currency crisis in 1998 (-44.9 
percent).  While facility investment showed some recovery in June, 
the central bank forecast investment growth for 2009 at -15.1 
percent. 
 
¶7. (SBU) Expansionary Macro Policy until Economic Recovery Clear: 
The MOSF announced on August 7 that economic indicators for the 
second quarter improved rapidly, but most still remained below 
pre-crisis levels.  The finance ministry also said, "Expansionary 
macroeconomic policy will be maintained until the private sector 
shows a clear recovery on its own." 
 
¶8. (SBU) Industrial Production Posts Six-Month Increase:  The NSO 
announced that industrial production in June rose 5.7 percent from 
the previous month, marking the sixth consecutive monthly increase. 
Also, the average capacity utilization of the manufacturing sector 
rose for the fifth straight month to 76.5 percent in June.  Services 
grew 1.7 percent from -0.9 percent in May. 
 
¶9. (SBU) Korea to Become Net Creditor Soon:  According to the BOK on 
August 19, Korea's external liabilities increased by USD 11 billion 
to USD 380.12 billion as of the end of June from three months 
earlier, with short-term debt accounting for 38.7 percent of the 
total, down from 39.6 percent.  The ROK's external credits stood at 
USD 372.56 billion, up USD 27.5 billion during the three-month 
period, boosted by increasing foreign currency reserves.  As a 
result, the nation's net external liabilities fell to USD 7.56 
billion as of June, down sharply from USD 16.5 billion in March. 
The central bank predicts a net external credit balance within this 
year, projecting a continuation of recent trade surplus and profit 
gains from leading exporters. 
 
Unit: USD 
Million        Q2 2008  Q3 2008  Q4 2008  Q1 2009  Q2 2009 
----------     -------  -------  -------  -------  ------- 
External Debt  421,657  425,516  381,057  369,141  380,116 
1.Short-term   176,184  189,598  151,060  146,107  147,253 
2.Long-term    245,473  235,918  229,997  223,034  232,864 
  General Gov.  32,897   24,244   21,141   19,042   20,355 
  Monetary      30,143   28,591   30,046   33,780   35,921 
    Authorities 
  Banks         211,490  220,799  171,720  161,842  168,019 
  Other Sectors 147,126  151,881  158,151  154,477  155,821 
Ext. Credits    423,939  401,552  348,424  345,066  372,561 
1.Short-term    336,351  319,921  279,598  278,421  303,624 
2.Long-term      87,588   81,630   68,826   66,645   68,937 
 
Net External 
  Credits         2,282  -23,964  -32,633  -24,075   -7,555 
1.Short-term    160,167  130,323  128,538  132,314  156,371 
2.Long-term    -157,885 -154,288 -161,171 -156,389 -163,927 
 
(Source: Bank of Korea) 
 
¶10. (SBU) Capital Inflow by Ethnic Koreans Triples:  Ethnic Koreans 
residing overseas sent a record amount of dollars to the ROK in the 
first half of the year to take advantage of the weakened Korean won 
and discounted property prices in the wake of the global economic 
crisis.  According to the BOK on July 27, the accumulated inbound 
capital transfer for the first six month of this year reached USD 
1.61 billion, 3.5 times more than that in the same period of 2008. 
The amount is 16 times and 23 times larger than what Korea received 
from abroad through capital transfers of ethnic Koreans in 2007 and 
2006, respectively.  Meanwhile, many ethnic Koreans kept money in 
the ROK rather than took it out of the country. The central bank 
said the outbound capital transfer totaled USD 601 million in the 
first half this year, down 26.6 percent from USD 820 million in the 
same period last year. 
 
 
Finance and Structural Policies 
------------------------------- 
 
¶11. (SBU) IMF Raises Forecast for the Korean Economy:  The 
International Monetary Fund (IMF) on August 10 forecast Korea's 
economic growth for 2009 at -1.8 percent, 1.2 percentage points 
 
SEOUL 00001402  003 OF 003 
 
 
higher than its forecast a month earlier.  The IMF left its forecast 
for 2010 ROK GDP growth unchanged at 2.5 percent.  In April this 
year, the IMF predicted that the Korean economy would shrink by 4.0 
percent and 1.5 percent in 2009 and 2010, respectively. 
 
¶12. (SBU) ADB Predicts V-Shaped Economic Recovery for Korea:  The 
Asian Development Bank (ADB) forecast that the Korean economy will 
shrink by 3.0 percent this year, and reverse course to grow by 4 
percent in 2010.  This 2010 forecast is higher than projections made 
by the Bank of Korea (3.6 percent), the International Monetary Fund 
(2.5 percent) and Morgan Stanley (3.8 percent).  The ADB also stated 
that ten ASEAN countries and Korea, China and Taiwan will bottom out 
with 3.0 percent growth this year and recover to the 2008 level of 
6.0 percent in 2010. 
 
¶13. (SBU) BOK Keeps Interest Rate at Two Percent:  The BOK's 
Monetary Policy Committee on August 11 decided to hold the benchmark 
interest rate at 2.0 percent, freezing the rate for the sixth 
consecutive month.  The decision was based on uncertainty about 
future economic growth despite evidence of recovery beginning in the 
second quarter. 
 
¶14. (SBU) Foreign Currency Deposits Rise to Record High:  According 
to the BOK, the total amount of foreign currency deposits held by 
Korean nationals and foreign residents stood at a record high of USD 
31.25 billion as of the end of July, swelling by USD 2.98 billion 
from the end of June.  Foreign currency deposits grew USD 4.52 
billion from the previous month as foreign currency bonds issued by 
state-owned companies reached a total of USD 3.4 billion for the 
same period. 
 
¶15. (SBU) Domestic Banks' Profit Rebounded in Q2:  The Financial 
Supervisory Service (FSS) announced that domestic banks made a net 
profit of 2.3 trillion won (USD 1.9 billion) in the second quarter, 
up 1.7 trillion won (USD 1.4 billion) or 302 percent from the 
previous quarter.  Meanwhile, the banks made a net profit of 2.8 
trillion won (USD 2.2 billion) in the first half of 2009, down 3.8 
trillion won (USD 3 billion), or 57.4 percent, from a year ago. 
 
¶16. (SBU) ROKG Tightens Banks' Bad Loans:  At an emergency economic 
measures meeting chaired by President Lee Myung-bak on July 30, the 
Financial Services Commission (FSC) stated that banks will be 
required to lower their bad loan ratios to 1.0 percent by the end of 
¶2009.  As of the end of June, the average bad loan ratio for banks 
was 1.5 percent.  Accordingly, banks will have to clear from their 
books bad loans worth about 20 trillion won (USD 16 billion) from 
August until the end of the year.  Separately, the FSS said bad 
loans held by the entire financial sector totaled 31.2 trillion won 
(USD 25 billion) as of the end of March, up 5.8 trillion won (USD 
4.6 billion) or 22.8 percent from the end of 2008. 
 
¶17. (SBU) Domestic Banks' Foreign Borrowing Nearly Triples in H1: 
According to the FSS, the mid- and long-term foreign currency loans 
of domestic nationwide banks totaled USD 14.02 billion in the first 
half, nearly three times that of the second half of 2008 (USD 4.85 
billion).  As for loans with maturities of one year or shorter 
(excluding overnight loans), the ratio of maturing foreign currency 
loans to new loans was 99.0 percent in the first half of 2009, 
higher than the first and second half of 2008 (97.6 percent and 75.0 
percent).  The FSS noted domestic banks with large foreign credit 
lines are unlikely to have serious problems in foreign currency 
liquidity for the present. 
 
TOKOLA