South Korea: monthly economic report - August
Published 22 September 2014
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This article is no longer current. Please refer to Overseas Business Risk – South Korea
Summary
Slowing growth
The Korean economy is likely to move to a lower growth path. Real GDP growth in Q2 decelerated to 3.6% yoy from 3.9% in Q1. Consequently, the Bank of Korea lowered its 2014 growth forecast to 3.8%. Exports fell in August for the first time in a year. Weaker demand, including from the US and China, combined with appreciation of the Korean Won is hampering export growth. Imports in August increased by 3.1% yoy, buoyed by the stronger exchange rate.
BOK cuts policy rate despite high household debts
Bank of Korea (BoK) cuts interest rate by 25 basis points to 2.25% in August for the first time in 15 months, raising concerns that this will exacerbate high household debt levels.
New measures to boost services
In August the government announced new measures to strengthen the service sector. Seven promising sectors are being targeted including health, tourism, contents, education, financial services, logistics and software.
Detail
Slowing growth: Weak global demand and the strong Korean Won
The Korean economy is likely to move to a lower growth path. Real GDP growth in Q2 decelerated to 3.6% yoy (0.6% qoq) from 3.9% yoy in Q1. In line with the slowdown in GDP growth, the Bank of Korea (BoK) lowered its growth forecast to 3.8% for 2014.
Korea’s exports fell in August for the first time in a year, by 0.1% year-on-year. Weaker demand from main trading partners including the US and China combined with appreciation of the Korean Won means export growth remains slow. Export growth is expected to be 6.1% yoy in 2014, which is significantly below the average annual growth of 12.9% from 2003 to 2013. Meanwhile, imports in August increased by 3.1% yoy. Improved domestic purchasing power on the back of a stronger exchange rate is expected to sustain import growth.
BOK cuts its policy rate despite high levels of household debt
The Bank of Korea (BOK) cut its interest rate by 25 basis points to 2.25% in August for the first time in 15 months. A key concern is that this will encourage further household debt, which already amounts to about KRW 1 trillion (£6bn) or 163.8% of disposable income (UK is 150.1%, Germany 93.2%, and US 114.9%).
Analysts are already concerned that household debt levels have been exacerbated by the easing of regulations on mortgages. The government set a single ceiling for Loan to Value and Debt to Value ratios at 70% and 60% respectively, effective from 1 August 2014. While experts have warned that any widening of Korea’s household debt presents longer term risks to the economy, BOK’s stance is unlikely to change in the face of pressure to support the government’s short term stimulus measures.
The reduced interest rate has placed added pressure on Korea’s banking sector, which is already operating under narrow profit margins due to restrictive financial regulations. The Fair Trade Commission (FTC) is investigating four major domestic banks over alleged reports of interest rate collusion, following complaints from consumers that the banks had cut their lending rates much less than their deposit rates.
Boosting Korea’s ailing service sector
The Korean economy’s reliance on manufacturing exports means it has a relatively weak service industry (58% of GDP) compared with many other developed economies (the average of US, UK, Germany and Japan is 76%). Furthermore, Korea’s service sector is largely made up of low value-added businesses such as family owned restaurants, and both profit and wage levels are much lower than in the manufacturing sector.
New measures
Shortly after President Park announced her Three Year Economic Plan in January, the government formed a Service Industry Task Force led by the 1st Vice Minister of Strategy and Finance and including vice ministers from each government department. They were each tasked with promoting one of 7 promising service sectors: healthcare, tourism, contents, education, finance, logistics and software. By mid August they had developed 135 measures to support the 7 sectors.
The government expects these plans to bring KRW 15 trillion (£9bn) of investment and 180,000 jobs by 2017.
The main initiatives for each sector are as follows:
Healthcare and medical
- Allow hospitals and other health-care providers to establish profit-seeking subsidiaries
- Increase the number of foreign patients
Tourism and contents
- Provide a one-stop service and incentives to develop 4 new tourist complexes including casinos and amusement parks
- Construct tourist attractions in famous spots including along the Han River
Education
- Attract more foreign students through the simplification of visa procedures
- Attract world class foreign universities to open campuses in Korea
Financial services
- Create a 3 year KRW 3 trillion (£2bn) state fund to support the service sector
- Improve the national pension system to increase the number of subscribers
- Raise incentives and de-regulate the financial markets to encourage emerging companies to be listed
- Allow stocks listed on the Korean Exchange to rise or fall by up to 30% from their previous closing price, compared with 15% at present
Logistics services
- Make Incheon International airport the main logistics hub in Asia by improving customs procedures and infrastructure
Software and ICT
- Set up a cluster for software industries based on US or German models
Deputy Prime Minister Choi acknowledged that previous government efforts to boost Korea’s service sector, most recently in 2012, failed due to excessive challenges at the National Assembly. This was mainly due to a deep rooted sentiment that the service sector only really exists to support the manufacturing-export sector. Many experts are concerned that this could again prove to be the main hurdle. Others are more upbeat, pointing to the increasing recognition by both business and government of the added value and growth that the service sector can offer.
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