South Korea is a rich affluent country home to 48.84 million productive citizens working in an industrialized modern hi-tech economy. As Asia’s third largest economy, this Asian Tiger has secured a sovereign rating of investment grade, a remarkable achievement considering it fell to junk status during the 1997-98 Asian financial difficulties. It is this 1997-98 Asian currency crisis that saw the dramatic collapse in value for the South Korean won ‘KRW’ although relatively short-term. With the support of the International Monetary Fund (IMF) with a $58 billion USD rescue package and adoption of IMF policies, South Korea staged an impressive quick economic turn around reflecting a ‘V’ shaped curve recovery as the IMF was finally paid out by August 2001. South Korea has since implemented strict austerity policies to counter this significant regional economic collapse which led to South Korea’s worst recession in over 30 years as real GDP contracted by 5.8 percent in 1998. Our analysis and summary below will help to summarize the key themes presently taking place for South Korea and its national currency, the won.
POLITICS: stable, democratic for free South Korea. National Presidential elections are scheduled for December 2007. A historic trade agreement with the United States was reached on April 2, 2007 for South Korea, current trade between the two stand at $75 billion USD. For further details on Korea’s political framework, please contact us at BankINTRO.com for currency consulting services.
ECONOMY: has relied in the past on its industrialized economy including exports in electronics, steel, ships, autos, textiles & clothing and machinery. South Korea has undergone a dramatic shift in its economy from a manufacturing base to export markets in the United States, Japan and China. With economic maturity, savings & investment have declined in favor of a new domestic services consumption oriented economy. The consumption based economy has been responsible for South Korea’s significant large rebound in economic growth since 1999. As South Koreans shifted from being predominantly savers to now consumers similar to citizens in the United States, debt has overtaken the economy with personal loans now contributing to a significant portion in relation to GDP. Fortunately for South Korea, a strong export led economy since 2002 has helped to cushion the consumer debt load but problems may start to begin shortly with a slowing United States economy now caught in a sub-prime real estate debacle. Is a second economic crisis on the horizon for South Korea or will the government be able to use some of its large foreign exchange reserves position to help mitigate a slowing domestic economy and cushion any currency shock?
South Korea’s giant conglomerates, chaebols, the family owned business empires that still control much of the economy are presently trying to improve their transparency ie. SK, Samsung Group, Hyundai, LG, Kumho, etc. The close and precarious relationship between the government, banks and chaebols have exposed the South Korean economy to significant debt and economic imbalances in the past most recently in 1997-98 where debt to equity ratios were very high. The Daewoo conglomerate, South Korea’s second largest chaebol collapsed in July 1999 from an enormous debt load of $78 billion USD. The Daewoo Group along with other chaebols have had to restructure their debts and organizational structure in order to satisfy creditors. At present, many large South Korean corporations are doing very well including Samsung of which sales of its flat panel televisions are skyrocketing.
Economic Statistics
Total GDP as measured by purchasing power parity stands at $1.18 trillion USD (2006) with corresponding GDP/Capita at $24,200. Market GDP for South Korea stands at $897 billion USD (2006). GDP growth rates include year 2002 at 5.8 percent of GDP, years 2003-06 at 4 to 5 percent of GDP, year 2006 at 4.8 percent, 2007 estimated at 4.3 percent (IMF), BankINTRO.com guessing more like 3 percent. Inflation quotes include year 2006 at 2.6 percent, QTR 4 2006 at 0.9 percent, year 2007 projected at 2.7 percent. The current account is in surplus at $2 billion USD (2006) or 0.3 percent of GDP. The decline in the current account is attributed to the currency stability and appreciation of the won over the last few years. The trade component is in surplus at $16.7 billion USD. Fiscal account is in surplus at 2.5 percent of GDP. External debt is at $250 billion USD (September 2006). Public debt stands at 32 percent of GDP (2006). Oil importer at 1.5 million bpd (2004), natural gas imports at 29 billion cu m (2004).
POSITIVE: unemployment has fallen from its peak at 9 percent in February 1999 to the current level of 3.3 percent (December 2006), South Korea is one of the 20 richest countries in the world, net creditor, very high savings rates, improved credit ratings for Korean companies, low inflation has kept interest rates down and led to a lowering of debt servicing costs, very large merchant marine of over 500 ships. CONCERN: history of labor unrest - strikes, too rigid. South Korea is one of the world’s largest oil consumers and is a net energy importer for oil which may impact domestic inflation and deteriorate balance of payment figures with current high oil prices, demographics problem - aging population.
BANKING SYSTEM: the Korean banking system has undergone an extensive recapitalization, privatization and restructuring since the 1997-98 currency crisis as it has strengthened. One area of concern is the potential for mass delinquent credit card and other personal debt payments amongst the consumer, many are highly leveraged. Interest rates are low with the Bank of Korea overnight call rate at 4.5 percent, highest rate since 2001. Bank of Korea, the nation’s central bank reports holding international reserves at an impressive $239 billion USD as of year 2006. Monetary policy is sound with the central bank pursuing inflation targeting with a band range of 2.5 to 3.5 percent for inflation.
REGIONAL ANALYSIS: Japan, China
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KNOWLEDGE:
Contact us at BankINTRO.com for our currency opinion on the net impact of North Korea on South Korea. Other topics of interest include how the powerful Chinese economy and its rising yuan/renminbi currency will impact regional Asian currencies including the South Korean won.
CURRENCY: ISO Symbol ‘KRW’, South Korean won. At time of review on April 4, 2007, the exchange valuation for the South Korean won was at 936.25 KRW to 1 US-dollar (USD) and/or 1250 KRW to the Euroland euro (EUR). As measured by purchasing power parity, the won is approximately 18 percent undervalued to the USD as of March 2007. The exchange rate regime follows that of float since December 1997. It is likely that the authorities will re-denominate their currency notes in the next few years, some reports have the new re-denomination at 1000 old to 1 new won note.
CURRENCY HISTORY: the South Korean won has been in circulation since 1962 and the sole legal currency for South Korea by March 1975. At the bottom of the economic collapse in late 1997, the won hit a low of 1811 KRW to the USD on January 9, 1998 primarily resulting from Japanese banks panicking and overselling the KRW driving the currency to a very short-term artificial low. During August 1999, the KRW was trading at a much stronger 1200 KRW to the USD. The won has traded in a stable range over the last several years. Historical exchange quotes for the won include: March 2006 at 974.93 KRW to the USD, March 2005 at 1007.92, March 2004 at 1165.66, March 2003 at 1236.17, January 2002 at 1317 KRW, year 2001 average at 1291, 2000 at 1131, 1999 at 1188, year 1998 at 1401, 1997 at 951, 1996 at 804, April 1995 at 765, April 1990 at 705, April 1985 at 855, April 1981 at 675, 1980 re-pegged at 580 KRW to the USD, from 1962 fixed at 125 KRW to the USD. Currency crisis dates include year 1997-98. During year 2004, South Korea was the world’s fastest rising industrialized currency. During January 2006, the government held an emergency meeting to discuss the won appreciation resulting from the booming economy at a time when the won was trading at a 9 year high against the JPY, USD.
CURRENCY FORECAST: there have been suggestions that South Korea is pointed towards a second currency crisis due to high personal debts and weaker domestic demand although counter balanced and supported by high international reserves. The won however in our opinion at BankINTRO.com is more vulnerable to external shocks such as a prolonged United States economic downturn triggered by a housing collapse in America which may severely impact U.S. consumer spending and demand for South Korean electronic products (America accounts for 17 percent of South Korea’s exports). The Bank of Korea have let their reserves increase sharply rather than allowing the exchange rate to accordingly appreciate. This policy manouvre may bring the illusion of security to investors and provide for reckless borrowing which there has been strong evidence of mass consumer borrowing and rising delinquencies. Further, as of December 2006, rising short-term debts among total external liabilities for South Korea is at its highest level since the 1997 currency crisis.
In the medium to longer term, the collapse of North Korea both economically and politically would have the greatest currency impact on South Korea. As outlined in our KNOWLEDGE section on further discussion on North Korea and how it relates to South Korea, this inevitable reunification will have the greatest impact on currency valuation for South Korea. This currency risk is prevalent and should not be ignored, the October 2006 North Korean nuclear tests serves as a reminder of the looming risk to the north. Total costs of reunification are estimated upwards of $2 to $3 trillion USD equivalent to South Korea.
Short-term currency targets for the South Korean won have it trading towards 1050 KRW to the USD, BankINTRO.com is educated guessing that South Korea will lower rates by year-end 2007 while the United States will surprise the market and raise their interest rates. The negative interest rate differential will in the short-term boost the USD and lower the South Korean won. However, in the medium to longer term the USD itself may experience further depreciation pressures going forward due to its own economic challenges, the Euroland euro would be a more appropriate yardstick for currency comparison. The KRW itself is up 22 percent to the USD since 2004 and it also appreciated by 30 percent to the Japanese yen (JPY) creating competitiveness difficulties to Korean exporters.
Overseas exports for South Korea stand at 40 percent of GDP, is the South Korean economy near the end of a business cycle? The stock market is high, house prices have moved higher coupled with strong exports particularly in electronics over the last few years which have all helped to strengthen consumer balance sheets. Corporate Korea is stronger and the won has appreciated due to healthy capital inflows, although there have been recent signs of a cooling attitude with respect to foreign investment flows.
Signs of a turning economy include a declining current account position (higher oil bill) for South Korea, peak in interest rates and slowing export markets. BankINTRO.com predicts an economic slowdown for South Korea resulting in a lower won valuation. A negative currency risk leaning is also aided by challenges that are posed by North Korea and the significant downward currency risk to the South Korea won when ultimately economic reunification takes hold. These are indeed interesting times for the Korean peninsula.
UPDATED: April 4, 2007
