Weekly Korea's Economy Digest (December 22 - 28, 2011)

Economy News Monday January 23, 2012 09:22 —Export Department

Retail market to grow 6.3% in 2012: survey

DEC 22, 2011 (Korea Times)

Growth in Korea's retail market is expected to slow down next year due to deepening concerns of an economic slump, a poll showed Thursday.

According to the survey conducted by the Korea Chamber of Commerce and Industry (KCCI), 120 experts forecast South Korea's retail industry will grow 6.3 percent to 229 trillion won ($199.3 billion) in 2012, compared with this year's growth estimate of 7.3 percent.

"The retail market will be directly affected by a possible economic slump," said the KCCI.

The survey said TV home shopping businesses are likely to post the highest growth rate among local retailers, with their sales jumping 19.9 percent to 11.3 trillion won, as consumers increasingly intend to shop more conveniently.

Online shopping mall sales will likely climb 13.1 percent on-year to 18.1 trillion won on the back of a smartphone boom, it said.

Large discount outlets' revenue will likely grow 8.3 percent to reach 40 trillion won, with department store sales expected to grow 10.6 percent to 30.2 trillion won, it added.

Businesses see profits drop in Q3

DEC 21, 2011 (JoongAng Daily)

Hampered by rising commodity prices, more companies dealing with debt Dec 21,2011 Korean companies saw their profitability drop in the third quarter as commodity prices surged and the global economy contracted.

According to a report by the Bank of Korea yesterday, the average operating profit to sales ratio of 1,522 listed companies stood at 5.3 percent during the July to September period, down from a median 5.5 percent in the second quarter. The central bank cited rising commodity prices as the main culprit behind the increase, as well as higher sales management costs.

The ratio has now fallen sharply since last year, when it stood at 7.4 percent in the third quarter, indicating that profits have shrunk.

Meanwhile, the ratio measuring their pre-tax net income to sales - another gauge of profitability - saw a significant drop from 5.6 percent in the second quarter to 3.1 percent. The central bank attributed the fall to the depreciation of the local currency. In the third quarter, the value of the Korean won retreated 8.6 percent to the U.S. greenback on-quarter. As a result, companies foreign debts grew larger.

They have also become less financially stable and moved further into debt, with the average debt to asset ratio shooting up from 97.4 percent in the second quarter to 102.1 percent in the third quarter.

Additionally, the proportion of companies that failed to repay the debt interest from sales rose from 30.2 percent in the second quarter to 35.5 percent. This is the highest rate since the first quarter of 2009, when it stood at 40.6 percent as the country was consumed by the after-effects of the global economic crisis.

"As external conditions have negatively impacted profitability, the growth and stability of listed companies has been retarded," said a BOK official. "The Korean won has also continued depreciating and shed 100 won from the previous quarter to increase companies foreign debt burden," he added.

The central bank also lowered its economic outlook for 2011 earlier this month as the sovereign debt crisis that began in Europe has started to affect the global economy.

Previously, the government and the BOK were still confident of achieving economic growth in excess of 4 percent when they revised the outlook from 4.5 percent to 4.3 percent in July. However, as the situation is Europe continues to see little improvement, and uncertainties cloud the global market, the Korean central bank was once again forced to change its projection. It now anticipates growth of 3.8 percent for this year and 3.7 percent for 2012.

When revising its outlook this month, the central bank noted that while the U.S. is still struggling with a stagnant housing market and slow recovery of its job market, European countries will continue to deleverage their debts as part of deepening austerity measures. As such, consumption is expected to fall in the U.S. and Europe, which both serve as major export markets for Korea.

The central bank projected that growth global trade will shrink from 6.6 percent this year to 5.4 percent in 2012.

This is likely to have a considerable impact on Koreas economy as its reliance on exports has grown to now represent more than 50 percent of the nations GDP.

Korea seeks to benefit from FTAs to beat global woes

DEC 22, 2011 (Korea Herald)

With economic doldrums gripping many parts of the world, Korea plans to cultivate fresh strategic export items and stimulate small and medium businesses to cash in on free trade pacts next year and keep Asias fourth-largest economy afloat.

The Ministry of Knowledge Economy on Thursday announced measures to boost transactions with its 45 trade partners and shore up exports, the bellwether for the national economy, at an emergency meeting of top economic officials presided over by President Lee Myung-bak.

"It seems that small- and mid-sized enterprises are still not keen to benefit from FTAs," Lee told the meeting.

"The government should better inform them so that they can actively take advantage of the pacts."

Under the plan, the government will set up 17 "FTA support centers" nationwide next year to help local small manufacturers understand the pacts and their potential benefits.

The government also plans to create a comprehensive online database where company officials access information such as on tariff regimes, technical standards and environmental regulations in their target countries.

Korea has free trade pacts with 44 partners including Chile, Singapore, India, Peru and the European Union. It has ratified an agreement with the United States but has yet to effectuate it.

Moreover, the government will pick 25 local food items to expedite exports, including paprika, seaweed and makgeolli, a Korean rice wine. This will also help prop up farmers deemed to be among the victims of the FTA, ministry officials said.

To carve out new niches in the global marketplace, the ministry said it plans to form a fund worth 100 billion won ($86.4 million) to back exports of Korean dramas, shows and other cultural content.

During the meeting, Lee underscored the significance of fostering new markets as well as retaining Koreas clout in existing ones in the wake of the global economic gloom.

"The government and private sectors should work harder together at a time like this," he said. "We have to beef up state support through export financing and insurance next year."

By Shin Hyon-hee

S. Korea's credit rating remains unchanged at A1 despite Kim's death: Moody's

DEC 23, 2011 (MK Business News)

Credit rating agency Moodys Thursday (local time) has maintained A1 for South Koreas sovereign credit rating and Stable for Koreas rating outlook despite the death of North Korean leader Kim Jong-il.

"The outlook for Korea's A1 local and foreign government bond ratings remains stable, given the country's very high degree of economic strength, as well as high degree of institutional and government financial strengths," Moodys said in a latest annual report on Korea. "Kim's demise does raise further uncertainties about the dynastic leadership transition in the North and the stability of the government in Pyongyang, but the robust state of the ROK-US alliance will continue to provide a strong deterrence to war," it projected.

Moodys uses four factors to evaluate Koreas credit including economic strength, which was classified as Very High, institutional strength, High, government financial strength, High, and susceptibility to event risk, Moderate.

"An intensification of the Eurozone crisis and deterioration in the global financial market conditions puts funding pressures on the Korean banking system. Continued success in reducing contingent vulnerabilities in the financial sector will be a key factor influencing the rating outlook," Moodys emphasized.

"The issue is whether the transfer of power to a young and inexperienced leader, Kim Jong-un, will occur without a power struggle which increases the unpredictability of the North Korean military and without provocative military actions taken against South Korea," Moodys said.

[Written by Young-sang Ryu - Haeun Bang / edited by Soyoung Chung]

Korea's real wages fall this year on high inflation

DEC 28, 2011 (Korea Times)

Korea's inflation-adjusted average wage declined this year as income grew at a slower pace than in 2010, while inflation rose sharply, data showed Wednesday.

South Korean worker's real wage averaged 2.72 million won ($2,350) in the January-September period, down 3.49 percent from a year earlier, according to calculations based on data from the central bank, the labor ministry and the state-run statistics agency. Last year, the real wage grew 3.8 percent as the economy expanded 6.2 percent.

The real wage is calculated by the value of the nominal wage set against the consumer price index.

The 2011 data marked the third lowest level since the real wage declined 8.54 percent in 2008, when the country was in the midst of global financial turmoil. The real wage dropped 9.3 percent in 1998 when the Asian-wide financial crisis hit the nation.

A fall in the real wage came as South Korean workers' income growth remained stagnant amid high inflation and slowing economic growth.

High inflation and a decline in real wage undercut household spending, hurting domestic demand and denting economic growth further.

The Bank of Korea said consumer inflation is expected to grow 4 percent this year, hitting the top end of its 2-4 percent inflation target band for 2010-2012.

The prospects for the economy are expected to be bleaker next year as the eurozone debt crisis and a slowing global economy increase economic uncertainty.

According to the central bank, the Korean economy is forecast to grow 3.7 percent next year, slowing from a 3.8 percent growth estimated for this year.

Consumer inflation is likely to grow 3.3 percent in 2012, but the growth of inflation is expected to remain at 4 percent or above for the sixth straight month in December, indicating that inflation concerns will linger for some time.

The government said earlier it prioritize reviving economic momentum and stabilizing the livelihoods of low- and middle-income families in a bid to obtain sustainable growth.

SMEs struggling as banks eschew risk

DEC 23, 2011 (MK Business News)

The CEO of a small ship parts manufacturer in Busan's Noksan industrial district used to ignore the signs offering "quick loans" on his way to work, but nowadays the garish signs catch his attention.

"We had a large loan mature at the end of last month, but the bank refused to roll it over," said the chief executive, surnamed Jeong. "I could only afford to pay off 100 million won [$86,500] of the principal, so I'll have to suffer the penalties for repaying late."

"The bank sent me a notice saying that it will seize factory equipment if the full sum is not repaid by the end of this month," he added, conceding that he was at his wit's end in terms of trying to overcome the liquidity crunch without resorting to private lenders, who offer easy cash with high interest payments.

As rocky financial forecasts drive commercial banks toward conservative capital management plans and prompt them to avoid risky loans, Korea's small and midsized enterprises (SMEs) are finding it increasingly difficult to secure loans. Many are already struggling as exports slow down and the global economy contracts.

Banks are choosing not to lend to SMEs as their loan default rates earlier this year surpassed the levels seen during the 2008 financial crisis. This is fueling a vicious spiral of liquidity crunches, operational difficulties and loan defaults for many of the nation's smaller companies.

Experts fear that many will be pushed toward highinterest private lenders in their search for financing during the economic downturn that is forecast next year.

Compared to conglomerates, smaller businesses have always had less clout in trying to borrow from commercial banks. But lately, many they have found themselves in dire straits as banks tighten the spigot further in an effort to bolster their own financial soundness.

According to the Bank of Korea, commercial banks' loans to SMEs rose by 19.53 trillion won in the space of 10 months, up from 433.53 trillion won at the start of 2011 to 449.27 trillion won as of October.

But the increase in banks' SME loans almost matches the amount of SME loans underwritten by Korea's three major loan guarantee agencies - the Korea Credit Guarantee Fund, the Korea Technology Finance Corporation and the Korea Federation of Credit Guarantee Foundations.

Some 19.01 trillion won in loans to SMEs have been guaranteed by these agencies, which are responsible for paying back roughly 85 percent of the borrowed amount in the event of a default.

"The data shows that commercial banks are becoming increasingly reluctant to lend money to SMEs without additional assurances from loan guarantee agencies," said an official at the Korea Credit Guarantee Fund.

Banks say such trepidation is understandable. According to the Financial Supervisory Service, the default rate of commercial banks' loans to SMEs shot up from 1.3 percent at the start of the year to 1.83 as of the end of October. This exceeds the previous high of 1.7 percent at the end of 2008 during the height of the financial crisis.

But banks' decision to turn off the credit taps has led to pressing challenges, such as an inability to extend the maturity of loans and higher interest rates.

"Even with the same level of collateral, banks charge a maximum interest rate of 9 percent a year, as opposed to 4 percent or 5 percent for conglomerates," said Suh Byung-moon, chairman of the Korea Foundry Cooperative Association.

"In 2007, SME loans were six times the size of loans to conglomerates," said Hwang Young-man from the Korea Federation of Small and Medium Businesses, the nation's largest SME trade group. "That amount shrank suddenly this year, finally to be outpaced by loans to conglomerates."

The problem has been compounded by the drought seen in other financing routes. Savings banks have been scaling back their corporate loans - an area where SMEs make up the majority of borrowers - as the shaky sector attempts to meet financial regulators' demands for financial soundness by curbing risk.

Savings banks' corporate loans stood at 55.02 trillion won in 2010 but fell to 40.5 trillion won as of June this year, according to FSS data.

Financial regulators plan to ease SMEs' financing by making regulatory changes, such as abolishing joint loan guarantees and streamlining banks' criteria for loan collateral.

"We plan to abolish the practice of joint loan guarantees to root out their negative impact," FSC Chairman Kim Seok-dong told reporters last week.

By Lee Jung-yoon

Office of Commercial Affairs, Royal Thai Embassy in Korea

Source : http://www.depthai.go.th

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