| South Korea |
April 24, 2000 |
| An Overview |
| Author : Wong Soo How |
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| Background |
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Years ago, a major Japanese camera maker christened one of its idiot-proof models, Bakachon. Its a derogatory Japanese term used to describe the Koreans. The logic was that the camera was so simple even a bakachon knew how to use it. The move created an uproar. Its also a painful reminder of Korean history - a past thats marked by humiliating invasion and colonisation by its Asian neighbours. The most difficult episode must have been the Japanese occupation for nearly 40 years in the first half of the last century.
One of Asias economic powerhouses today, South Korea was virtually created overnight at the end of the Second World War. It became a pawn in the Cold War game when the Soviets and Americans divided the Korean peninsula into two after the Japanese ended their occupation. The move proved to be ominous as it set the stage for a war sparked off by the communist Norths invasion of the South on June 25th 1950. The conflict stopped in July 1953 when a truce was declared. By then, it was estimated that some 300,000 South Koreans had died.
In the immediate years following the war, South Korea was one of the poorest countries in the world. It didnt help that the dividing line on the Korean Peninsula left South Korea the poorer of the two, as most of the natural resources and infrastructure were in the north. However economic recovery got underway from 1960 when the then President Park Chung Hee began a modernization programme. He wanted to build up South Korea as a manufacturing base thats powered by a cheap educated workforce. The strategy paid off. From being more impoverished than the African state of Sudan in the 1950s, the country is now one of the richest in Asia.
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| Economy |
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Contribution to the economy by sectors (1998).
Agriculture 4.9%
Industry - 43.5% (of which 30.7% is in manufacturing)
Services - 51.6%
Major Exports
Electronic products $39.7 billion
Light industry products $25.0 billion
Textiles $16.5 billion
Motor Vehicles $9.9 billion
Chemicals $9.6 billion
Footwear $0.8 billion
Major Export Destinations
US 17%
EU 13%
Japan 12%
It was one of the hardest hit and the first to bounce back from the Asian economic crunch. With the strong turnaround in Asia, the country rebounded from a negative 5.8% economic growth rate in 1998 (at the height of the crunch) to register a spectacular comeback of over 10.7% in 1999. The government attributed the sterling performance to the strong demand for Korean exports from the US, and the low interest rates which make borrowing cheaper for companies. Other latest indicators on the health of the economy have been equally rosy. Foreign companies poured in over 600 million US dollars in direct investments in February. Thats a 100% increase over the same period last year. Foreign investors were attracted by the offer of well-known Korean companies that were up for sale.
Looking ahead, lending agencies like the World Bank and Asian Development Bank (ADB) are upbeat about the South Korean economy but thinks it will slow down slightly. The World Bank has forecast a 6% growth for this year, while the ADB expects a range of between 6% and 7%.
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| Bright spots in the economy |
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In the short term, the economy is expected to post a record upswing in the second quarter of this year, according to a domestic survey involving nearly 1,800 manufacturing companies. Particularly, firms making information and communications goods, automobiles and semiconductors will see brisk sales. The finding also said those focusing on domestic sales are likely to turn in better profits than those that are export oriented. The study also forecast that larger companies would see better improvement in profitability than smaller companies.
Based on the strong recovery, some stock market analysts expect the Korea Stock Price Index (KOSPI) to, by the second half of the year, hit as high as 1,450 points from the present less than 1000 points. They think the current stock market is not reflective of the strong rebound in the economy. Some even expect the KOSPI to double in the next 5 years. Of particular interest to investors are companies in the information and communications sector. According to Hyundai Research Institute, the combined net profits of listed companies in that sector were up by over 620% last year. Especially hot with investors were those listed on the tech heavy secondary board, Kosdaq (the equivalent of Nasdaq). Their shares spiralled into gravity defying heights. The frenzy led the market capitalization of the top 10 internet companies listed on Kosdaq to be 75 times their turnover, while market value of the top 10 old economy stocks listed on the main board, the Korea Stock Exchange, was only 0.7 times their revenue. Prime examples of those issues that will continue to be popular this year include Daum Communications, Saerome Communications and Hangul and Computer.
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| Risks |
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Despite the upbeat forecast from most analysts, several factors may put a damper on the economic recovery. Amongst them, possible increases in domestic interest rates and oil prices, which will raise the cost of doing business and make South Korean exports less competitive. Also to watch will be the US, which is South Koreas biggest export market. Further increases in US interest rates may hurt export-oriented companies.
Then theres the question of tech stocks. A sudden sell off by investors in major markets may spook the Kosdaq. A major contention is that many of the internet companies have yet to make money. A sharp correction on the Nasdaq will definitely drag the Kosdaq down as both are highly correlated, according to Head of Research at Daewoo Securities, SJ Kim.
The perennial threat from nuclear ready North Korea also looms large. But for the moment, the situation seems to be under control. An interesting point to note is that since only a truce was declared in 1953, both sides are technically still at war.
For more information on the performance of South Korea funds, go to fund selector
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CPFIS Registered Investment Administrator
