S. Korea Shifts Gears : Surplus Replaces Chronic Deficits

In 1963, when Jin Nyum joined the Economic Planning Board, South Korea could not prepare its national budget until the United States let it know how much aid it could expect.

In those days, Jin said the other day, “60% of the entire national budget and 90% of the imports of South Korea were financed by American aid.”

But this year is shaping up as a historic turning point--the year in which South Korea changes from a nation with chronic deficits into one with surpluses in merchandise trade and in current accounts.

Jin, who is now an assistant minister of economic planning, said he is not yet certain that 1986 will mark the beginning of an era of uninterrupted surpluses. The price of oil, he said, could go up and cause trade deficits again.

But few other analysts expect any return to deficits and Jin himself said that an era of uninterrupted surpluses is expected, whether it begins this year or not.

An American analyst, who asked not to be further identified, said that the era of surpluses is at hand.

“They’ve reached the stage,” he said, “where their current accounts surplus will continue to grow and strengthen. Their foreign borrowing will peak, and gradually foreign debts will be paid off. It gives them more policy options.”

In 1977, South Korea had a statistically insignificant current accounts surplus of $12 million, the only one it has enjoyed since the country was established in 1948. But this year, Jin said, it is looking forward to a surplus of about $1.5 billion in trade and $500 million in current accounts, which includes trade and such non-trade transactions as shipping, tourism and insurance.

Americans expect South Korea’s global trade surplus to surpass the official forecast and are bracing themselves for another increase in the South Korean surplus with the United States, which last year amounted to $4.3 billion, according to Korean statistics.

The historical turnaround has been speeded by what South Koreans call “the three blessings”--the rise in value of the Japanese yen, lower oil prices and declining world interest rates.

This year South Korea expects to save about $1 billion on its oil import bill and at least $100 million in interest payments on its $47.5-billion foreign debt, the third largest among the world’s developing countries. A windfall of about $1 billion in additional exports is expected because of currency changes, principally the Japanese yen’s appreciation, Jin said.

The three so-called blessings add up to the equivalent of 2.3% of the $90.9-billion gross national product that South Korea expects to have this year.

Wasn’t a Good Year

In a country where real economic growth of 6% is considered necessary just to create enough jobs for young people entering the labor force, and where exports make up 32% of the gross national product, 1985 with its 5.1% growth in GNP and 3.5% increase in overseas sales was not a good year.

By contrast, 1986 is taking shape as a banner year, marred only by troubles in shipping, overseas construction, domestic banking and shipbuilding. Growth is expected to exceed 8%. Early estimates put growth in the first three months at more than 10%.

In addition, wholesale prices were expected to rise by only 1% and consumer prices by 2.5%. This is a far cry from the double-digit inflation that accompanied spurts in the economy until the early 1980s.

Ironically, the appreciation of the yen is helping South Korea increase its trade surplus with just about every country except Japan. In testimony in Japan’s Parliament last month, Japanese Prime Minister Yasuhiro Nakasone used what he called a spurt of imports of South Korean steel products into Japan to underscore a complaint that the yen had appreciated excessively.

“That’s like a biscuit for an elephant,” Jin said. “They don’t have to be so greedy.”

Noting that quality is a bigger factor than price in selling to Japan, Jin said exports to Japan are growing at a rate of only 7%. Korean imports from Japan, however, are soaring, a fact that has again driven home Japan’s global dominance in many manufacturing sectors and South Korea’s reliance on Japan for crucial machinery and electronic parts for products it makes.

Had No Alternative

Jin said the Korea Traders Assn. analyzed 146 key components imported from Japan and found that South Korea had no alternative but to buy 86 of them--about 60% of the total--from Japan.

With Japanese export prices and Korean demand both increasing, South Korea’s trade deficit with its neighbor is expected to increase to $4.5 billion this year, compared to $3 billion last year, Jin said.

South Korea paid 57% more for its imports of machinery and electronic parts from Japan in the first four months of 1986 than it did a year ago, the Korea Traders Assn. said. Last year, South Korea depended on Japan for 61% of its imports of such goods.

Nevertheless, the rise in the yen’s value has produced what Jin called “a significant new development.” Japanese buyers, as well as sellers, are beginning to visit South Korea, he said, “trying to find ways to collaborate with Korean firms in producing electronics and automotive parts.”

Announcements of specific deals in new sales to Japan are scarce, but in one definitive move, Ssangyong Corp. established four distribution centers in Japan to handle about 750,000 tons of cement exports, its first shipments ever to the neighboring nation. Attributing its breakthrough to the yen’s appreciation, the company said it hopes to double or triple exports within the next two years.

Jin said the next two or three years could produce fundamental changes in trading patterns, partially to the benefit of the United States and Western Europe.

May Change Suppliers

South Korea will try to produce about 20% of the key components it now relies on Japan to supply. But it will seek to switch its procurement of another 20% of those parts to suppliers in the United States and Western Europe, whose products are relatively less expensive than before the yen’s appreciation, he said.

Even with an additional $1.5-billion trade deficit with Japan, appreciation of more than 40% in the value of the yen against the South Korean won is expected to produce an overall turnaround of about $1.4 billion in the nation’s current accounts--from a deficit of $882 million to a surplus of $500 million. This is thanks to South Korea’s new competitiveness against Japan in third markets.

In the first four months of this year, South Korean exports to the United States rose 23% and sales to Western Europe expanded by more than 30%, Jin said. Overall, exports are increasing by more than 20%.

The boom is particularly dramatic in electronics exports, up 34% in the first four months. Exports of videocassette recorders are more than four times what they were last year, and personal computers and other information equipment have more than doubled.

Semiconductor exports are expected to increase by more than 20% this year, thanks both to the yen’s appreciation and to an anticipated U.S.-Japan agreement under which the Japanese would increase the price of chips they sell in the United States.

Also contributing to the historic transformation was a spurt in car exports.

Car Exports Soaring

Last year, South Korea exported 123,110 cars, 47% of its production, and is expected to more than double exports this year, to 292,000 cars or 52% of total production, American analysts said.

Hyundai Motor Co., which began exports to the United States in February, expects to ship about 100,000 cars to the United States and about the same number to Canada, where it now ranks as the No. 1 import firm.

Next year, Hyundai plans to ship 200,000 cars to the United States and Daewoo Motors and Kia Industrial plan to export a combined total of about 200,000 cars to the U.S. market.

Imports of automotive components from Japan will amount to about 50% of the value of overall car exports, thus limiting South Korea’s gain in trade surplus to about half the value of its car exports, Jin said. Even that sum, however, is likely to amount to more than $600 million next year.

A major push in South Korea’s own automotive parts industry is expected to produce $1.7 billion in exports this year, up 55% from last year.

Troubles that in other economies would likely create a crisis have been held under control here by governmental intervention. Six of South Korea’s major banks, formerly owned by the government, are estimated to hold about $4.5 billion in loans on which no interest is being paid--a sum equal to about 5% of GNP. Moreover, only 10% of the outstanding loans are considered likely to be paid off in the future.

Bad Loans Extended

In the case of shipping and shipbuilding firms, the bad loans were extended on government orders. Also, construction companies have found it impossible to collect an estimated $2.2 billion due from Middle East countries where they won contracts worth billions of dollars when oil prices shot up during the 1970s. Another $1 billion in payments were withheld because of alleged construction defects, according to U.S. sources.

Employment in all three industries has plummeted but government rescue efforts have prevented any major upheavals.

In December and again in May, the Bank of Korea extended to the six troubled banks a total of $1.1 billion in bail-out financing at an annual interest rate of 3%, half the normal rate it offers to private banks. More rescue financing has been promised.