Cablegate: South Korea Economic Briefing - August 2009

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RUEHGP/AMEMBASSY SINGAPORE 7159
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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

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