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South Korea: Waiting For A Tiger To Wake Up


Is South Korea's two-year economic downturn over yet? The government insists that it is, but don't tell that to restaurant owner Park In Yong. In mid-April she watched on TV as President Roh Moo Hyun told an audience in Turkey that a corner had been turned and the Korean economy was robust again. Yet Park and the other shopkeepers in her middle-class Banpo neighborhood in southern Seoul say they haven't seen any upswing in consumer spending. "Customers just don't seem to see any light at the end of the tunnel," says Park.

Indeed, the signals that Korea's increasingly high-tech economy is sending out are mixed. Roh and other government officials insist that the worst is over. They point out that household spending inched up 1.3% year-on-year in the January-March period, double the 0.6% pace of the previous quarter, when it returned to positive territory for the first time since March, 2003. "Sure the pace of improvement is slow and gradual, but I'm now quite sure that consumer spending is on track towards normalcy," says Huh Chan Guk, chief economist at Korea Economic Research Institute, a think tank for Korea's big conglomerates, or chaebol. The optimists also note that the household savings rate is up. Koreans are traditionally big savers, so officials were alarmed when savings plunged from an average of 9.9% of disposable income in 2000 to just 1.4% in 2002, as consumers loaded down with credit-card and other debt dipped into their savings. The rate was back up to 4.8% at the end of 2004 and is still rising.

But this may not be enough to build a sustained recovery, many analysts say. Korea's domestic economy has been in the dumps since early 2003, when a group of chaebol-affiliated credit-card companies crashed after handing out millions of cards to consumers who couldn't afford to pay their bills. Spending has since slowed to a crawl, and residential and commercial construction are down sharply. Nearly all of Korea's growth has come from exports of products like cars and electronics. Now even exports are faltering, partly because of the strength of the local currency, the won. A May 20 Bank of Korea report showed the economy grew at an annual rate of just 2.7% in the January-March quarter, its weakest pace in the last seven quarters.

There will be no relief soon from the pressure. The won, at just over 1,000 to the dollar, has gained more than 3% so far in 2005 after rising 15.21% in 2004. Its appreciation -- attributed to a weak dollar and Korea's big, export-based current-account surplus -- hurts profits and undermines fledgling consumer confidence. Executives at giant Samsung Electronics Co. say every 10% gain in the won's value knocks more than $1.5 billion off annual profits.

RECORD PILES OF CASH

Exports rose an extraordinary 31% last year and contributed four-fifths of economic growth in the first quarter. But some experts see exports suffering a double blow from a rising won and a slowing Chinese economy. More than 20% of Korean exports now go to China, and Morgan Stanley (MWD) economist Sharon Lam says there will be "a tough time ahead" for Korea if the Chinese economy loses steam.

What does Korea Inc. say? Choi Sang Won, general manager at carmaker Hyundai Motor Co., concedes that domestic car sales dropped 5.6% in the first four months of this year after falling 33% over the past two years. But he insists the economy is on the rebound and expects sales to begin rising soon. Even if local sales remain slow, Hyundai execs are confident they'll meet their overseas sales target of 1.78 million vehicles this year, up 17% from 2004. Sales in China are expected to jump 40%, to 200,000 cars.

Corporate actions, however, speak louder than words. A Bank of Korea survey of 5,400 Korean companies found that they were sitting on a record cash pile of $66 billion at the end of 2004. Yet there are no signs that spending on new plants and equipment, up a so-so 3.1% last year, is accelerating. "Resources are available to rekindle the dynamism of the economy," says Park Jong Kyu, senior researcher at Korea Institute of Finance, a think tank funded by commercial banks. Available, but not yet lighting a spark.

By Moon Ihlwan in Seoul


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