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RUEHRC/DEPT OF AGRICULTURE WASHDC
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RUEHGP/AMEMBASSY SINGAPORE 7391
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RUEHIN/AIT TAIPEI 4181

UNCLAS SECTION 01 OF 04 SEOUL 001733 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - OCTOBER 2009 
 
¶1. (U) This cable is sensitive but unclassified and not/not intended 
for Internet distribution. 
 
------------- 
In This Issue 
------------- 
 
-- IMF:  Korea's Per-capita GDP Down in 2009 before Recovering 
-- Trade Surplus Continues to Grow in September 
-- Number of Self-Employed Falls by Most in 6 Years 
-- Assembly Budget Office Foresees 3.8 Percent Growth 
-- ADB Becomes More Optimistic about the Korean Economy 
-- Survey of Economists:  Modest Economic Recovery in 2010 
-- ROKG Plans to Increase National Tax Revenues for 2013 
-- ROKG to Create 650,000 Jobs in 2010 
-- Overseas Construction Orders Increased in the Third Quarter 
-- Central Bank Holds the Benchmark Interest Rate at 2 Percent 
-- Issuance of FX Bonds Suspended 
-- FDI Continues to Grow in the Third Quarter 
-- FSS Toughens Rules on Non-Bank Mortgages 
-- Foreign Investment in Domestic Bonds Tops USD 42 Billion 
-- Domestic Banks Increase Loan Provisions to 133.6 Percent 
-- KRX to Open Nighttime Trading of KOSPI200 Futures on CME Globex 
-- Currency Swap Line with Japan Extended 
-- NACF Plans to Split Into Bank and Distributor 
 
Domestic Economy 
---------------- 
 
¶2. (SBU) IMF:  Korea's Per-capita GDP Down in 2009 before 
Recovering:  The International Monetary Fund (IMF) projected that 
Korea's per-capita GDP will decrease to USD 16,450 this year, due to 
the weaker won and sluggish corporate investment and private 
consumption.  But with the faster-than-expected economic recovery 
and the strengthening of the won in recent months, the international 
organization raised its outlook for the nation's output growth per 
person to USD 17,547 in 2010, USD 18,988 in 2011, and USD 20,549 in 
¶2012.  It surpassed USD 20,000 for the first time in history in 2007 
at USD 21,653, but fell to USD 19,136 last year as the value of the 
won fell precipitously.  Initially, the IMF forecast that it would 
take more than five years for Korea to achieve USD 20,000 per-capita 
GDP. 
 
¶3. (SBU) Trade Surplus Continues to Grow in September:  The Korea 
Customs Service (KCS) revealed that exports shrank by only 7.8 
percent from a year earlier to USD 34.5 billion in September.  It is 
the first single-digit percentage drop since October 2008. 
September imports fell 24.6 percent to USD 29.8 billion, marking the 
smallest decline this year.  As a result, the goods trade surplus 
stood at USD 4.7 billion in September compared with USD 1.67 billion 
in August.  On a month-on-month basis, exports and imports grew 19.1 
percent and 9.3 percent from August, respectively, affected by 
expectations of economic recovery. 
 
¶4. (SBU) Number of Self-Employed Fall by Most in 6 Years:  The 
number of small business owners in September fell at the fastest 
rate in more than six years, as consumers became increasingly 
reluctant to spend.  According to a National Statistical Office 
(NSO) report, the number of small business owners dropped by 
324,000, or 5.4 percent, to 5.74 million in September from a year 
before, the steepest fall since April 2003, when a credit card 
bubble burst.  The number has been declining for 13 consecutive 
months since September 2008, when the collapse of Lehman Brothers 
triggered the global economic crisis.  The self-employed accounted 
for 33.6 percent of Korea's entire workforce in 2006, the highest 
percentage among the 30 members of the Organization for Economic 
Cooperation and Development (OECD), making Asia's fourth-largest 
economy extremely vulnerable to outside shocks as small independent 
businesses are more severely affected by economic downturns than 
salaried workers.  The number of self-employed decreased to 24.1 
percent at the end of September this year. 
 
¶5. (SBU) Assembly Budget Office Foresees 3.8 Percent Growth:  The 
National Assembly Budget Office (NABO), the Korean equivalent of the 
U.S. Congressional Budget Office, stated in its 2010 economic 
forecast report that the Korean economy will grow 3.8 percent in 
¶2010.  The economic growth will be high in the first half, affected 
 
SEOUL 00001733  002 OF 004 
 
 
by global stimulus packages, but will weaken for the rest of the 
year due to anticipated implementation of exit strategies and the 
strengthening won.  The NABO also forecasted the number of employed 
people to increase by 145,000, or 0.7 percent, in 2010 following a 
135,000 decline in 2009.  Consumer prices are expected to increase 
2.5 percent next year, slightly lower than the 2.8 percent rise in 
¶2009. 
 
¶6. (SBU) ADB Becomes More Optimistic about the Korean Economy:  The 
Asian Development Bank (ADB) raised its forecast on Korea's GDP 
growth for 2009 to -2.0 percent from -3.0 percent, while maintaining 
its 2010 forecast at 4.0 percent.  The ADB added that signs of 
recovery are not strong enough for Asian governments to unwind their 
expansionary fiscal policies.  (NOTE:  ROKG agencies are now 
signaling that 2009 GDP growth may be positive.) 
 
¶7. (SBU) Survey of Economists:  Modest Economic Recovery in 2010: 
According to a survey by the Federation of Korean Industries (FKI) 
of 21 executive economists at private and state-run research 
institutes, Korea's GDP growth is expected to fall by 0.7 percent in 
2009 by grow by 3.8 percent in 2010.  The forecasts were up 1.7 and 
1.5 percentage points, respectively, from the survey in May.  The 
more positive forecasts were driven by government measures and 
foreign exchange rates rather than by improvements in fundamental 
economic factors.  Just over 57 percent answered it would be 
appropriate to implement an exit strategy in the first half of next 
year. 
 
¶8. (SBU) ROKG Plans to Increase National Tax Revenues for 2013:  In 
order to increase fiscal soundness, the Ministry of Strategy and 
Finance (MOSF) aims to collect 219.5 trillion won (USD 187.6 
billion) in 2013 tax revenues, rising 54.5 trillion won (USD 46.6 
billion) or 33 percent, compared to 2009.  In 2010, tax burden per 
capita is expected to rise by 190,000 won (USD 162) or 4.4 percent 
from 2009 to reach 4.53 million won (USD 3,872), a record high.  The 
increase will be driven by higher corporate tax and value-added tax 
revenues reflecting economic recovery in the future.  However, 
revenues from comprehensive real estate taxes and composite income 
taxes are forecast to continue declining in 2010. 
 
¶9. (SBU) ROKG to Create 650,000 Jobs in 2010:  In an emergency 
economic measures meeting chaired by President Lee Myung-bak on 
October 15th, the government adopted plans to create about 650,000 
jobs in 2010.  As a part of the plan, major job creation measures 
that are scheduled to end in 2009 will also be extended until the 
first half of next year.  The plan must be approved by the National 
Assembly as part of the 2010 budget.  In addition, a foundation to 
create jobs will be established through an easing of regulations for 
new start-ups in the education, medical and tourism industries.  The 
government will also take steps to improve the business environment 
for people starting small- and medium-sized enterprises. 
 
¶10. (SBU) Overseas Construction Orders Increased in the Third 
Quarter:  The Ministry of Knowledge Economy (MKE) reported that 
Korean construction and engineering firms received orders to build 
overseas plants worth USD 16.03 billion in the third quarter, up 6.2 
percent from USD 15.09 billion a year earlier.  In a clear sign of 
recovery, bidding on massive construction projects in the Middle 
East and Africa resumed amid rising oil prices and an improving 
global economy.  MKE anticipated the overseas plant orders would 
reach USD 16.5 billion in the fourth quarter.  Orders in the first 
half, however, tumbled 67.3 percent to USD 6.7 billion from the 
previous year. 
 
 
Finance and Structural Policies 
------------------------------- 
 
¶11. (SBU) Central Bank Holds the Benchmark Interest Rate at 2 
Percent:  The Monetary Policy Committee of the Bank of Korea (BOK) 
decided to hold the benchmark interest rate at 2.0 percent for the 
eighth straight month.  The rate was 5.25 percent in October 2008. 
BOK Governor Lee Seong-tae clarified that the central bank is 
prepared to remove the expansionary policy quickly in case of 
inflationary pressure. 
 
¶12. (SBU) Issuance of FX Bonds Suspended:  The government has ceased 
issuing currency stabilization bonds for the foreseeable future to 
 
SEOUL 00001733  003 OF 004 
 
 
limit the fresh inflow of dollars and reduce upward pressure on the 
local currency.  Since the easing of the worldwide credit squeeze in 
April, local banks and public firms have brought massive amounts of 
dollars into the country.  Along with the active foreign buying of 
local stocks and bonds, and a strong current account surplus, the 
government has created a surplus of dollars and undercut the 
won-dollar rate.  According to the MOSF on October 9, the ROKG will 
review the decision.  The ROKG sold sovereign bonds worth USD 3 
billion in April, and planned to sell an additional USD 3 billion in 
bonds in the second half of the year. 
 
¶13. (SBU) FDI Continues to Grow in the Third Quarter:  The MKE 
announced that inbound foreign direct investment (FDI) totaled USD 
3.38 billion in the third quarter, up 17.4 percent from a year 
earlier, continuing to increase after soaring 61.9 percent in the 
second quarter.  Accordingly, accumulated inbound FDI reached USD 
8.02 billion for the year up to September, rising 8.1 percent from a 
year ago.  Notably, FDI from Japan surged 161.9 percent, mainly 
affected by a strengthening yen, and FDI from the EU also ballooned 
47.2 percent, swinging back to a rise in the third quarter.  In 
contrast, FDI from the United States slid 44.5 percent. 
 
¶14. (SBU) FSS Toughens Rules on Non-Bank Mortgages:  The Financial 
Supervisory Service (FSS) announced that non-bank lenders such as 
insurance companies, mutual financing companies and savings banks 
will, like banks, also be subject to debt-to-income (DTI) regulation 
on mortgages effective October 12.  The DTI regulation was adopted 
during the previous Administration to curb real estate speculation. 
This put a ceiling on the size of a mortgage people can get based on 
their income.  Those who seek to buy a home in Seoul, for example, 
would be subject to a 50 percent DTI rule, while those buying homes 
in Incheon and Gyeonggi Province would face between 60 and 65 
percent ratios.  The FSS also bolstered the loan-to-value (LTV) 
regulation.  Currently, one is allowed to obtain a mortgage equal to 
up to 60 percent of home value from insurers, and up to 70 percent 
of the value from other financial services firms.  Each will see the 
LTV ratio drop by 10 percentage points.  The measure came as people 
turned to non-bank lenders to get mortgages following the 
strengthening of DTI regulation on banks. 
 
¶15. (SBU) Foreign Investment in Domestic Bonds Tops USD 42 Billion: 
According to the FSS, domestic bonds held by foreign investors 
totaled 48.9 trillion won (USD 41.8 billion) at the end of 
September, up 11.4 trillion won (USD 9.7 billion) since the 
beginning of the year.  Even though 22.5 trillion won (USD 19.2 
billion) in bonds held by foreigners was redeemed during the period, 
foreign investment in domestic bonds reached its highest level since 
August 2008.  In particular, thanks to steady net purchasing by Thai 
investors, Asian investment in domestic bonds accounted for the 
largest portion at 46.2 percent, or 22.6 trillion won (USD 19.3 
billion). 
 
¶16. (SBU) Domestic Banks Increase Loan Provisions to 133.6 Percent: 
According to the FSS, domestic banks' ratio of financing to lending 
(with maturities of no less than one year for both financing and 
loans) was 133.6 percent at the end of July, up 28 percentage points 
from the end of 2008.  In 2009 (until the end of July), foreign 
currency loans from banks with maturities of a year or longer shrank 
USD 9.87 billion but borrowings with the same maturity increased USD 
9.17 billion. 
 
¶17. (SBU) KRX to Open Nighttime Trading of KOSPI200 Futures on CMF 
Globex:  The Korea Exchange plans to launch nighttime trading of 
KOSPI200 futures after the closing of regular session starting from 
November 16, 2009.  The move has already been approved by the 
Financial Regulatory Authority.  The trading hours of nighttime 
session of KOSPI200 futures, which has been launched in 
collaboration with the Chicago Mercantile Exchange, are from 18:00 
to 05:00.  Investors who wish to participate in the nighttime 
trading need to open a futures trading account (the existing futures 
trading account may be used) and enter into a service agreement for 
nighttime trading.  To promote investor awareness, the Korea 
Exchange is organizing mock trading sessions and road shows on the 
trading rules and regulations -- how and when to utilize, and how to 
use the dedicated home trading system (HTS).  On September 24th, FSC 
approved the related regulation on nighttime trading of the KOSPI200 
futures. 
 
 
SEOUL 00001733  004 OF 004 
 
 
¶18. (SBU) Currency Swap Line with Japan Extended:  South Korea has 
agreed to extend its currency swap line with Japan by an additional 
three months in an effort to help stabilize the local financial 
market, the Bank of Korea (BOK) said on October 16.  In 
mid-December, the BOK agreed with the Bank of Japan to expand its 
existing won-yen swap facility to USD 20 billion from USD 3 billion. 
 In late March, the two central banks agreed to extend the swap line 
by six months until October 30.  The BOK said that with the latest 
agreement, the swap facility will be extended until February 1, 
¶2010.  It also has a won-dollar swap arrangement of USD 10 billion 
with Japan which can be tapped in the event of an emergency. 
 
¶19. (SBU) NACF Plans to Split Into Bank and Distributor:  The 
National Agricultural Cooperative Federation (NACF), or Nonghyup has 
announced plans to divide into two entities -- a bank and an 
agricultural products distributor.  According to the restructuring 
plan, its credit business would separate from the company in 2012 
and become a financial holding company with financial affiliates -- 
bank, securities companies, asset management and futures companies. 
An agricultural products distribution business would split off as an 
economic holding company by 2015.  Nonghyup's banking business has 
been profitable, thanks to its monopolistic status in rural areas. 
This has compensated for losses in its agricultural products 
distribution business.  The division plan, however, goes against the 
government's plan of spinning both businesses off by 2011. 
Moreover, it is requesting that the government support the plan by 
giving 6 trillion won (USD 5.1 billion) for the agricultural 
products distribution business. 
 
STEPHENS