Is South Korea de-coupling?

This past week, I caught an article in Wirschaftswoche (WiWo), the German Business Week, which suggested that the South Koreans were very confident about their economy and had learned from the Asian Crisis.

Just today, the South Koreans released GDP numbers that many would find amazing, showing that the economy grew 0.1% in the first quarter compared to Q1 2008 Q4 2008.  Q4 2008 was a 5.1% fall, so that’s a pretty prodigious uptick which comes largely from household and private consumption.  It certainly begs the question as to whether the Asians are ‘de-coupling,’ a term I never though I would use in a positive sense.

What is clear from the reports at a minimum is that intra-Asian trade is increasing and keeping countries like Korea from feeling the full impact of the slow down in the West. (A 30% currency devaluation helps too.)

Below is a Bloomberg video on the Korean economy:

Also, here is what WiWo had to say (my translation):

South Korea wants to present itself at the just opened Hanover Fair as a country with a promising future – and as an unbroken dynamic export nation. The worst is behind the country. But, the Koreans find one development unpleasant.

Like a ballerina, the young lady dances around in front of the black sedan of Mr. Yoo. She leads the heavy but graceful Hyundai into the car park at the Seoul Lotte warehouse and bows so deeply that her little pink hat almost touches the ground. She chirps, that she is sorry for the precious time that had to be wasted by the important Client in the queue. Yoo Jae-Wook, head of consultancy Nemo Partners, sees the ‘parking show,’ as a good sign: “Every day the same large crowd. Officially, we have crisis, but they are all go shopping! ”

South Korea, this year the official partner country at the Hanover Fair, wants to present itself to the world as a haven of stability amid the present global crisis. This is not only outdoor advertising, but is quite the mood in the country itself. The fourth largest economy in Asia has come through the global shock calm. Quite unlike the Asian crisis of 1997/98, when some Koreans even donated their gold to support the economy. “In Seoul, they are not making cuts to their quality of life,” says Kim Nan-Do from the National University in Seoul. The Koreans, according to the local Siemens boss Josef Meilinger, understand the global crisis as an opportunity: “You look at which share of the world pie you can grab now.”

Crisis? What Crisis?

What crisis überhaupt? The Koreans come to Hanover full of self-confidence: “Our economy is overcoming the global crisis faster than other countries,” said Cho Hwan-Eik, president of the trade promotion company Kotra,. “We have high-performance products, sophisticated marketing strategies, and government and businesses have relatively low debt-burdens. Indeed, South Korea with government debt of 38.5 percent of annual gross domestic product is much better than Japan, for example, with almost 185 percent. The country has dealt with the recession from just over a decade ago and it is partially immunized against new problems – at least in many Koreans opinion. “The Asian crisis has made us seem well trained. We have learned to survive,” says business consultant Yoo.

In the areas of information technology, electronics, shipbuilding and auto industries, South Korean firms are forcing their way into the world class tier, but also lately in green technologies. In addition: The banking system is reasonably stable. “In comparison to the great Asian crisis a decade ago, our banking and financial system today is less vulnerable,” says Jong-Goo Yi of the state financial oversight of FSC. At that time, many indebted Korean conglomerates like the car manufacturer Daewoo and KIA, the Hanbo steel producer as well as several banks were forced into bankruptcy or had to give up their independence. Today, however, the liquidity of the 44 major Korean corporations is “so high that these companies have even more months to survive crisis,” says Yi.

Cautious optimism in the boardrooms

It is also reassuring, according to Yi, that the Korean banks, on average, have less than one percent of their loan portfolio in “toxic” assets – they have little invested in complicated derivatives. Accordingly, the financial structure is much healthier than in Europe or the USA.

In the boardrooms of the export-dependent companies, the typical sound is somewhat subdued optimism. In 2008, the export share of the economy was about 55 percent. Now, in the face of the crisis of world trade, sensitive setbacks are threatening. “Until now we have had the rapid depreciation of the won to hold us above water,” said Ko-Yung Sang of Standard Chartered Bank in Seoul. Against the dollar, the exchange rate of the Korean currency fell by almost 30 percent in the past twelve months. So Korea’s largest car manufacturer Hyundai / KIA lost in the U.S. less than one tenth of its turnover, although the total there saw a 40 per cent fall. The worst for Korea could already be behind them. The most difficult month was January, when the Korean exports crashed 34.2 percent. Afterward, the figures have improved. In March, the trade surplus was even at a record high of 4.6 billion U.S. dollars. For 2009, the economy ministry expects an increase of approximately 20 billion U.S. dollars, significantly more than previous estimates.

Even in crisis, South Koreans can rely on their main trading partner China, which at last count bought 23 percent of all Korean exports – 14 percent went to the European Union, and nearly ten to the U.S.. Above all, the shipbuilders were successful: Korean shipbuilders recorded a sales increase of 61 percent in March.

Such export power could ensure that South Korea’s recession in 2009 is relatively mild with a fall of minus two percent, the government previously estimated. Some prognosticators still hold a crash of up to six percent possible. The FKI Industries notes, however, that the mood among business people has improved significantly. “The downturn will lose significant momentum,” said JP Morgan economist Lim Ji-Won Lim. He holds a recovery already this summer for possible.

Need for social consensus is growing

Koreans feel uncomfortable, however, with the development of its labor market – despite the fact that other industrialized countries might be jealous at the figures. The unemployment rate has gone since February 2008 from 3.5 to 3.9 percent. Especially small and medium-sized enterprises should cut some 200,000 further jobs, which would bring the rate upward a further percentage point.

Therefore, the need for social consensus is rising. Entrepreneurs, workers and government have agreed on a program “to share the social pain.” In many companies the employees take up to 30 percent wage cuts. Managers voluntarily reduce their salaries, officials waive ten percent of their salaries and donate the money for the needy. Several unions, in fact notorious for militant strikes, want to work, fighting to forgo wage increases – in exchange for guaranteed jobs and recruitment.

In addition, the government is on a major stimulus program: 25 billion euros – about 2.5 percent of gross domestic product – to keep the economy on track: “The main objective is the preservation of jobs,” President Lee Myung-Bak announced.

The same applies for the job of dancing white car park in the Lotte department store. Strikingly, many customers pay with cash coupons, which the State distributed as part of the economic program to 2.6 million poorer citizens.

Watch developments in Korea. If we do see de-coupling oin the way up, it is going to be in countries like Korea where the upswing will happen first.

Südkorea gibt sich auf der Hannover-Messe krisenresistent –


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.