Magazine article Risk Management

International Profile: South Korea: South Korea Has Been Hard Hit by the Global Financial Crisis and While the Recessionary Cloud Is Unlikely to Abate Soon, There Are Many Factors That Make the Country's Allure as Strong as Ever

Magazine article Risk Management

International Profile: South Korea: South Korea Has Been Hard Hit by the Global Financial Crisis and While the Recessionary Cloud Is Unlikely to Abate Soon, There Are Many Factors That Make the Country's Allure as Strong as Ever

Article excerpt

[ILLUSTRATION OMITTED]

Despite Korea's adoption of expansionary monetary and fiscal policy, economic growth slowed in 2008 and, like much of the world, continued to slow in the first quarter of 2009 (down 4.4% year on year). And there is no immediate recovery on the horizon; a severe recession is expected to grip the economy through the current year, with GDP numbers expected to contract by 4% due to the drop in both exports and domestic demand.

In combination with the global financial crisis, the main factors in Korea's economic decline have been domestic demand falling along with the rise of inflation, the deterioration of the labor market and the bursting of speculative bubbles in the stock, property and credit markets. Private consumption is also suffering from the growth of unemployment and the country's very high level of household debt. Financial debt represents just over 1.5 times the average annual disposable income, a situation likely to spur savings in a context of increasing risk aversion. According to a 2008 IMF survey titled "Stress Testing Household Debt in Korea," households in Korea devote a higher proportion of their income to paying interest on debt than households in both the United States and Japan.

The current "destocking" process, during which retailers must wait for demand to catch up with supply, will likely persist, with inventories remaining 25% higher than normal as recently as March. The financial sector will also bear watching. Despite support from the government (via liquidity injections, loan-guarantee extensions and export insurance) and from abroad (with swap lines completed with the United States, Japan and China), the debt-service burden borne by companies jeopardizes their ability to meet their commitments. The increase in the default ratio since the end of 2008 attests to the difficulties smaller companies have had in meeting commitments to the banking sector, which in turn could be affected by the deterioration of the debt-repayment capacity of both companies and households. Bankruptcies, for example, were up 19.2% in 2008 compared to the previous year.

All of this must also be viewed in front of the backdrop of the North Korea situation. In the political arena, the adoption of tougher policy towards Pyongyang marked the coming into power of Lee Myung-Bak of the conservative Grand National Party in December 2007. South Korea's condemnation of North Korea's latest nuclear testing points to continued high tension between the countries.

Accessing the Market

South Korea's import system is fairly open, due to the removal of most import obstacles in the last few years, especially since 1996 when the country achieved membership in the Organisation for Economic Co-operation and Development (OECD). Many tariff peaks remain, however, particularly in the agricultural sector. The weighted average rate of customs duty is 45.5% for the primary sector and 7.5% for the secondary sector.

Despite the progress made by South Korea toward opening up market access, obstacles to trade persist mainly in the form of nontariff barriers. The obstacles continually faced by foreign companies usually derive from different technical standards (for cars and electrical appliances, for example), tedious health inspections and tests (often engendered by the special characteristics of Korean food) and tough approval procedures (for things like cosmetics and medical equipment). Intellectual property compliance in South Korea continues to cause concern as infringement remains widespread. The government, however, is determined to strengthen compliance. Trademarks are better protected today provided that the relevant procedures for defending them have been followed. The government is expected to pursue reforms focused on combating corruption and fostering corporate transparency.

The main problem remains weak economic and penal sanctions as well as poor enforcement, which fails to deter re-offending. …

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