Unexpected Resilience in South Korea’s Economy

While world markets still are staggering from the aftershocks of Sept. 11 and the economy of Japan is slumping ever deeper into recession, South Korea is bucking the trend.

The South Korean stock market is rallying and the economy has proved more resilient to the repercussions of the terrorist attacks than that of almost any other industrialized nation. Unemployment is at its lowest level in four years. As retailers worldwide moaned about a glum Christmas, sales here were robust over the holidays and are expected to accelerate this year.

“Korea has confounded the skeptics. It has been impressive,” Charles Adams, deputy director of the International Monetary Fund’s regional office for Asia and the Pacific, said at a news conference in Seoul last week.

The South Korean stock market was among the best-performing markets worldwide last year. Its Kospi index chalked up a 37.5% gain--oddly enough, most of it after the attacks on the World Trade Center and the Pentagon.

This rally has been fueled largely by foreign institutional investors looking for a break in the economic doom and gloom prevailing in the four months since the terrorist attacks. Foreign investors snapped up $2.5billion worth of South Korean stocks in the last quarter of 2001, gaining a 37% stake in the Korean market.

The strength of the market is all the more dramatic compared with that of Japan, where the Nikkei has been in a free fall for most of the last year and its financial sector in a period of retrenchment.

While each day seems to bring forth gloomier tidings about Japan, South Korean news services are reporting upbeat economic data: In the last week, it was reported that seasonally adjusted unemployment had sunk to 3.3%, the lowest in four years; that industrial output has been higher than expected and that retail sales are projected to grow nearly 9% this year.

“I think Korea is the most dynamic market in Asia at the moment and many investors agree,” said Paul Presler, a market analyst with the Seoul office of Nomura Securities. “If Japan doesn’t get its act together, Korea could be seen as an alternative.”

South Korea has not been immune from the global economic trends.

The consensus among forecasters is that the nation’s economy grew a modest 2.6% last year and that growth this year will hover around 3.5%--impressive only when compared with the flat growth rates in the United States and Europe and the shrinking economies of Japan, Taiwan, Hong Kong and Singapore.

“It is in comparison to our competitors that we are doing well,” said Oh Jong Nam, an economic advisor to South Korean President Kim Dae Jung. “If you were to give us an absolute grade it would be only a B. When you grade on a curve, that is when we look good.”

Paul Gruenwald, the IMF’s resident representative for Korea, said during a news conference last week, “Given the state of the world economy, Korea is doing as well as it can. But Korea will return to healthy growth and achieve its growth potential only when the rest of the world recovers, particularly the United States, which is an important market.”

Four years ago, South Korea was forced to seek a $19.5-billion bailout from the IMF after a severe liquidity crisis nearly gave it a reputation as the Argentina of Asia. But the last of the loans was paid back last summer--nearly three years ahead of schedule--and credibility has gradually returned to the market. Still, expectations for South Korea were exceedingly low at the start of last year.

The prevailing wisdom was that the bursting of the high-technology bubble and the overall global slump would drive South Korea into recession along with Taiwan, Singapore and Hong Kong. After all, exports account for 46% of South Korea’s economy.

But what was lost in the high-tech field was offset by strong sales of cars and ships. Sales of Korean cars in the U.S. rose 30% last year over 2000, much of it because of the popularity of new Hyundai models.

The effect of the global softening also was cushioned by exports to China and a robust home market. Rhee Namuh, head of research at Samsung Securities in Seoul, said easy consumer credit and large end-of-year bonuses paid by many companies fueled a buying binge by consumers.

“This was the first time that the Korean economy showed such resiliency. That was a surprise to everybody, including myself,” Rhee said.

Since the liquidity crisis, South Korea’s largest companies and banks have been busily restructuring.

Although market analysts believe that much more work is needed to bring firms up to U.S. standards in terms of corporate governance, they believe that the South Koreans have gone much further than the Japanese and therefore are being rewarded.

“The Koreans are very conscious of the mistakes that Japan has made. Japan has done very little to deal with its problems, while Korea has acted quickly in terms of liberalizing and taking action,” said Peter Thorn, the South Korea representative of Westdeutsche Landesbank.

Hong Nam Ki, executive director of Morgan, Stanley in Seoul, said South Korea needs quite a few more years of sustained growth before it can be considered in the same league as Japan by the investment community.

“In the 1960s, they used to compare Korea to the Philippines, then in the 1970s to Taiwan,” Hong said. “Now Korea has moved up the value chain. Its market is still much smaller than Japan, but its products are competing.”

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