South Korea Business Forecast Report Q3 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	65
ISBN Number	1745-0721
Product Code	BMI01236

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Summary

Defying expectations that the economy was in its first recession since the Asian financial crisis in 1998, South Korea posted positive growth in first quarter of 2009. To be sure, this was largely the result of unprecedented monetary and fiscal stimulus, but conditions have appeared to improve significantly since then, fuelling hopes that the worst of the downturn has passed. While we agree that the pace of contraction has been easing, we remain sceptical about the prospect of a sustained recovery given the still-weak global environment and uncertain outlook for domestic consumption and investment. We have therefore retained our 2009 and 2010 real GDP growth forecasts of -3.3% and 1.8% respectively.

Although pressure on the government to support the economy has been easing as conditions improve, these concerns have been eclipsed by the spectre of rising tensions with Pyongyang.

Although we do not expect hostility to translate into large-scale military confrontation, we foresee tensions remaining elevated over the coming months as Pyongyang reiterates its hardline policies (possibly in preparation for succession). Troubles on the international front have been compounded by domestic issues including the ruling party's humiliating defeat in April's by-elections as well as the suicide of former president Roh Moo-hyun.

Even though the worst of the downturn may now be passed, we expect the recovery of the South Korean economy to be very gradual, and somewhat uneven. The main drags on growth will come from falling private consumption and investment, while net exports and government spending should continue to make a positive contribution. The lower won will aid a turnaround in the current account, and we expect South Korea to post a surplus of US$14.8bn in 2009 after the US$6.4bn shortfall recorded in 2008. Nonetheless, the shrinking trade surplus will gradually weaken the size of the current account surplus, while the overall balance-of-payments position will remain vulnerable to portfolio flows.

The government has already taken considerable measures to restore the flow of credit to the economy, including a KRW40trn fund to purchase bad loans and other unwanted assets from companies in the process of restructuring. It has also urged large conglomerates to repair their balance sheets by shedding non-core assets. Despite these efforts, however, the growing supply of government paper coming onto the market has seen a sudden but steady rise in long-term treasury yields, raising the cost of borrowing for businesses and homeowners alike.

Content

Executive Sumary
Pulling out All The Stops to Support Economy
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- Political Challenges Weigh on Ruling Party, but Mandate Intact
- Although The Ruling Grand National Party (Gnp) Is in A Difficult Political Position as A Result of Rising Tensions with
- Pyongyang and Discontent over Its Management of Domestic Affairs, We Do Not Think This Will Have Any Major Impact on The Course of Policy over The Coming Months.
- North-South Relations
- Heightened Tensions to Persist Indefinitely
- We See A Growing Possibility of A Military Clash between North and South Korea, Most Probably in The West Sea, as
- Pyongyang Prepares to Test More Missiles and Provoke Seoul by Violating Its Territorial Waters.
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- Remaining Cautions, despite Signs of Improvement
- While We Are Encouraged by A Growing Number of Signs That The South Korean Economy Has Moved beyond The Worst of The Downturn, We Continue to Believe That The Recovery Will Be A Very Gradual and Somewhat Uneven Process.
- Monetary Policy
- Rates on Hold, but Risks to Growth Remain
- despite Leaving Rates on Hold for The Fourth Consecutive Month in June, We Continue to Believe That The Bank of Korea Will Cut Rates before The End of The Year as The Economy Struggles to Emerge from The Downturn.
- Balance of Payments
- Bop Supported by Import Contraction, Capital Inflows
- While South Korea Posted A Respectable Current Account Surplus of US$4.28bn in April, Its Positive External Position Was to A Large Degree Driven by Portfolio Flows, Which Are Notoriously Volatile.
- Investment Climate
- Capital Markets Law to Change Financial Landscape
- While We Think The Implementation of The South Korea's Long-Awaited Investment Services & Capital Markets Act
- (Fscma) Will Gradually Increase The Competition and Consolidation in The Financial Services Sector, We See These Changes as Being Very Long-Term in Nature, and Therefore Unlikely to Affect The Landscape of The Industry in The Short Term.
Chapter 3: 10-Year Forecast
- The South Korean Economy to 2018
- Structural Problems to Constrain Long-Term Growth
- We Are Expecting Annual Real Gdp Growth in South Korea to Decelerate from An Average of 5.1% between 2000 and 2007 to around 3.2-3.4% over 2012-2018 as The Working Age Population Peaks and The Export-Focused Manufacturing Sector Faces Increased Competition
Chapter 4: Special Report
- The Outlook for Global Banking
- Table: Loa N-to-Deposit Rat Ios, Selected States
- Table: Loa N Gro Wth (% Chg Y-O-Y), Selected States
- Table: Commercial Banking Business Enviro Nment Rat Ings, Selected States
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment
- Table: Bmi Business and Operat Ional Risk Rat Ings
- Institutions
- Table: Bmi Legal Framework Rat Ings
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Consumer Electronics
- Market Overview
- South Korea's Domestic Consumer Electronics Devices Market Was Estimated to Be worth around US$11.6bn in 2008.
- Metals
- Executive Summary
- The South Korean Steel Market Is Maturing, following Two Decades of Strong Growth. Rapid Growth in China's Industrial Capacity Has Limited Steel and Steel Product Export Growth, Although There Is Still Room for Growth.
Chapter 7: BMI Global Assumptions
- Global Assumptions
- Table: Glo Bal Assumptions
- Table: Glo Bal & Regional Real Gdp Gro Wth
- Table: Commodities
List of Tables
- Table: Political Overview
- Table: Economic Activity
- Table: Monetar Y Policy
- Table: Balance of Payments
- Table: South Korea Long-Term Macroeconomic Forecasts
- Table: Asia, Fdi Annual Inflows
- Table: Bmi Trade Rat Ings
- Table: Consumer Electronics Overview
- Table: South Korea's Metals Industry, 2006-2013