Where is S. Korean economy heading for in 2010?

By Na, Haejung

SEOUL, Jan. 15 (Xinhua) -- Amid a gradual recovery seen in the global economy, South Korea thus far has been emerging out of the global economic downturn at a faster-than-expected rate.

According to a report by the Ministry of Strategy and Finance, the nation's economy marked the 2nd highest economic growth rate during the third quarter of 2009, posting an on-quarter increase of 3.2 percent.

In addition, the economy has seen a record-high trade surplus in 2009, posting a 40.4 billion-U.S. dollar gain, a report by the Korea Customs Office said.

With its accomplishments made last year, the South Korean economy is once again expected to maintain its upward trend, experts and media at both home and abroad have said in one voice.



REASONS FOR S. KOREA'S RAPID RECOVERY IN 2009
Behind its fast growth lie multiple factors, ranging from the economy's sound fundamentals to the government's prompt, aggressive responses, the finance ministry said.

As the economy was exposed to the sub-prime mortgage, which triggered the global financial crisis, at the minimum level, with domestic financial institutions' sub-prime related investment coming in at 230 million U.S. dollars, or 0.01 percent of their total assets, negative effects from the crisis could have remained limited, according to the ministry.

The economy also benefited from its previous experience of the 1997-98 Asian Financial Crisis, during which major structural reform brought about improved soundness in the financial sector, explained the ministry.

For example, local banks excelled in various financial indices, such as BIS ratio and Tier 1 ratio, which have been adjusted and fixed at a stable level even in the wake of the crisis, at 14.2 percent and 10.8 percent, respectively.

Diversification of the nation's export market contributed to keeping the economy away from freefalling, with its export targets and targets well spread, the ministry said.

Meanwhile, the government led the recovery with timely procedures for the sake of real economy and financial markets at the same time.

In a bid to stabilize the economic sector, the government has firmly carried out various expansionary macroeconomic policies, such as endorsing a supplementary budget worth 28.4 trillion won (25.4 billion U.S. dollars) and frontloading 64.8 percent of the expenditure in the first half.

Measures have been taken to stabilize the financial markets as well, of which come currency swap agreements with the U.S., China, and Japan worth 30 billion U.S. dollars each.

The government, in order to support and stabilize the livelihood of low- or mid-income class, also focused on job creation and launched a new system of micro credit financing project

2010 ECONOMIC OUTLOOK
With the South Korean economy reportedly regaining growth momentum in 2009, it is widely expected to continue with a positive growth in 2010, beating its peer countries.

The finance ministry and the central bank both announced that the economy would make a better-than-previously-expected performance in 2010, with the finance ministry expecting a 5 percent growth and the BOK saying a 4.6 percent gain.

International organizations, such as the IMF and the OECD, also remained optimistic, saying a growth of 4.5 percent and 4.4 percent, respectively, is likely.

The forecasts come as the private sector is expected to normalize as companies start to expand investment and expenditure and domestic demand is back on track, Chang Hwa-tak, analyst at Dongbu Securities, said.

Also, private consumption and corporate investment are both expected to expand in 2010, thanks to revitalizing consumer sentiment in line with a global economic recovery, according to a report by Samsung Economic Research Institute (SERI).

While private consumption is expected to increase 3.1 percent from a year earlier in 2010, facilities investment will likely gain as much as 8.2 percent and construction investment 2.1 percent, SERI said.

Trade volume, on the other hand, is likely to contract year-on-year to mark a surplus of 20.6 billion U.S. dollars, mainly due to imports increasing faster than exports.

In line with the real economy sector expected to move briskly, financial markets will continue its 2009 trend, with stock prices gradually shooting up and the local currency gaining strength.

First, the nation's key index expected to hike during the first quarter and make a slight downturn in the second quarter, Cho Yoon-nam, analyst at Daeshin Securities, said.

The nation's benchmark index, KOSPI, may rise as high as the 1,800 level during the January-March period, according to the analyst, as the nation's major companies report their performances in 2009 and it will advance into the MSCI Developed Market index, while it may face risks of short-term price adjustments in the next quarter.

The South Korean currency may further hike against the U.S. dollar, averaging at 1,100 won per greenback in 2010.

While the dollar carry trading coming from low interest rates, fiscal deficit problem and discussion on the shift of key international currency keep weakening the U.S. dollar value, the South Korean won is expected to strengthen from its 2009 state, SERI said.

Market interest rates, on the other hand, are likely to rise slightly to 6.4 percent in 2010 mainly due to the financial authorities' quantitative tightening policy to absorb liquidity, SERI also said.

LINGERING RISKS & CONSTRAINTS

Despite optimistic views prevalent in the market, South Korea's economy still faces uncertainties as the government mulls a right time to put an exit strategy into action.

Amid some expecting an exit strategy is drawing near, real economy and the financial side both remain fragile in terms of employment and the foreign exchange rate.

Local analysts are pointing at tightened job market as a major risk to the economy, with the finance ministry and the Statistic Korea expecting the employment rate to fall to 58.5 percent, a 11-year low.

A survey by the Korea Chamber of Commerce and Industry also showed that the country's top 500 companies plan to curtail the size of employment although the South Korean government's focus on generating new jobs.

"It will still remain difficult to pull up employment rate in 2010, considering the distortion and instability of the job market," Lee Keun-tae, analyst at the LG Economic Institute, said.

"The unemployment issue hinges on how the government will support the service industry to absorb human resource from those expelled from the manufacturing sector as it may have a high employment effect," Lee added.

The stronger won poses a threat to the economy, which, together with high oil and natural resource prices, may jeopardize local exporters, which have been the economy's backbone.

If further hiking against the U.S. dollar, the local currency may draw too much overseas investment, triggering overflow of liquidity in the market and causing another trouble.

Global economic conditions also burden the South Korean economy amid global imbalances strengthening protectionism, oil price fluctuating, and lingering risks of bad loans in the U.S. and East European markets.

In light of such issues, South Korean experts are suggesting an exit strategy should be implemented only after various factors taken into account.

Local media also project that while the government should gradually kick start taking measures to normalize the economy, it should remain extra-cautious with respect to the timing for withdrawing liquidity, which is what an exit strategy is mostly about.


Editor: Fang Yang