South Korean economic growth slowing due to what reasons and will growth continue to slow?

  Like so many other economies around the world, South Korean economy is being affected by debt crisis in Europe. Currently Korean government reports show that the GDP(Growth Domestic Product) did not grow as much as it did in the second quarter of 2011. Why is the South Korean economic growth becoming slower? Is it simply due to the European debt crisis? Will the economy continue to grow slower or will it recover in the fourth quarter of 2011? By comparing two articles, one from Korea Joongang Daily (one of the top four newspapers in South Korea), and another relatively short article from BBC News, we will try to find the answer to these questions.

  According to BBC News, Korea's future economic perspective is gloomy. It views that Europe's economic downturn caused by the debt crisis and slowdown of the US economy will negatively affect South Korean exports. Since half of South Korea's GDP relies on exports, the article believes that the South Korean economic outlook is not bright. Also, it mentions about the high level of debt that South Korean household contains. Due to this high level of debt, the article says that households will avoid consuming, trying to pay back its debt and interests. Therefore, since two components of GDP are likely to shrink, the article says that GDP growth will not show large growths as the Bank of Korea (BOK) predicts it to be.

  Korea Joongang Daily shows further pessimism to Korean economic growth but with different reasons. It mentions how the BOK's optimistic estimates of GDP growth have been proven wrong. Although the BOK says that the due to decrease in the exchange rate, exports have risen and therefore, predicts that GDP growth will rise in the fourth quarter, the article shows fear for the impact of other domestic problems to the economy. It writes that the currently due to the impact of over-investment in housing, Korean households hold large amounts of debt. This debt is causing decrease in demand for consumption. Due decrease of consumption, firms are also trying to keep hold of cash instead of investing for new facilities. According to Korea Joongang Daily article although the exports rise, due to decrease in consumption and saving, it predicts that the Korean GDP will not grow that much.

  Also, the Korea Joongang Daily article shows fear for stagflation of the economy. Stagflation is an economic phenomenon which happens when prices continue to rise during recession. The current Korean economy is hard to define that it is in a recession since the GDP is increasing rather than showing negative growth rate. However, the Korean economy is surely experiencing less consumption and less investment by firms, showing signs for potential recession. This is surely a problem in Korea since even though the economy is experiencing inflation where asset prices and incomes go up, consumption is low. However, I believe it is too much of an exaggeration in the current situation to predict South Korean economy to have stagflation.

  By reading two articles, it is seen that the future Korean GDP growth will not be positive as the BOK expects it to be. For the reasons for the slowdown of GDP growth, Korea Joongang Daily seems to give more reasonable reasons that explains the current economic data. Unless exports grow in large amounts, which extremely unlikely due to current economic situations in the US and Europe, Korean economic growth will cool because of decrease in consumption due to large household debt and decrease in investment by firms in reaction to the shrinking consumption.

KORUS FTA will be in effect soon or not?

South Korea and the United States are in the progress of implementing a Free Trade Agreement deal. To see how South Korean press and Foreign press views the KORUS FTA, I selected one article from the Hankyoreh, a popular South Korean newspaper, and another from the Wall Street Journal, an internationally famous newspaper.

Currently South Korea's largest opposition party, the Democratic Party(DP), has been opposing against the final approval of the KORUS FTA. Also, protests from interest groups that disadvantage from the implementation of the Free Trade Agreement are likely to occur. However, despite these oppositions, the Wall Street Journal viewed that sooner or later the FTA will be passed anyway. It said that the implementation KORUS FTA is a matter of time. Also, it said that according to data from Korean Federation of Industries, the FTA will boost Korea's economic output by 5.6% in 10years and will create 350,000 jobs. 

In case of the Hankyoreh, it views the KORUS FTA with criticism. The Korean government has not spent enough time to make a fair deal with the United States. The ruling Grand National Party(GNP) has been pushing the ratification bill without carefully scrutinizing the provisions in the KORUS FTA. For example, according to the U.S. version of KORUS FTA, Korean firms are not able to sue the United States court trials, while the firms from the United States may sue Korean firms and Korean government in court. The newspaper argues that this deal is an unequal agreement but the Korean government does not care much about how there are provisions that severely disadvantage South Korean firms. It further argues that the agreement should not be passed unless such clauses are modified.

The Wall Street Journal concentrates on the economic benefits of the KORUS FTA, while the Hankyoreh writes about the disadvantages that may disadvantage Korean firms when the KORUS FTA becomes in effect. Neither of these articles are telling lies but their writings are only representing one side. To understand the whole story of KORUS FTA it is crucial to read both sides of the story.

Korean won-dollar exchange rate, how will it affect the Korean economy?

Currently, the Korean Won-Dollar exchange rate has risen tremendously over the past few weeks. The exchange rate was 1,062 won to a dollar on September 1^st which changed to 1,193 won to a dollar on September 26^th. This 12.3 percent drop in the value of Korean won has caused serious loss to South Korean households and firms which buy imported products. For instance, sandwiches which would normally cost 4000 won(approximately $3.76) on the September 1^st will now be 4492 won(around $4.23). Also, the stock market fell tremendously on October and continues to drop.

However, this is something that South Korea had gone through in 1997-1998 when it experienced a financial crisis. During that period millions of Koreans lost jobs and oil prices sky rocketed affecting other prices to rise. However, the Korean economy quickly recovered in a year and showed better growth rates than before the crisis. Also, it went through the 2008 global financial crisis and recovered.

So, will Korea be able to recover from this massive depreciation of Korean won?

I picked two articles: an article from the Economist, one of the world’s famous magazines, and one from Hankyoreh, one of the top four most read newspapers in South Korea. They both write about depreciating value of Korean currency(Won) and how this will affect the future Korean economy. However, on the same topic, they predict different futures of Korean economy.

The Economist expects a positive future for the Korean economy. Although the won has been weakening significantly, since Korea is an export oriented society, this drop in the value of Korean won will be beneficial for exporters since they can export more at a cheaper price. Also, since the Bank of Korea, which is the Korean central bank, has foreign reserve of $312 billion, which is larger than was in 2008, the central bank has control over the exchange rate and can bring the value of Korean won up if the exchange rate drops. Moreover, the Economist writes that Korean commercial banks are less reliant on short-term, foreign denominated debt than in 2008. Due to these factors the Economist predicts the Korean economy to possess little danger and can be a comparatively safe place to invest money in.

On the other hand, the Hankyoreh, a Korean newspaper, points toward a different direction. The article in the Hankyoreh’ refutes most points made by the Economist. Based on data and interviews with government officials or bankers, the Hankyoreh shows no confidence to the Bank of Korea’s foreign reserves In contrast to the Economist’s data, which said Bank of Korea spent $4billion to stop the exchange rate from going further down, the Hankyoreh wrote that Bank of Korea spent close to $10billion. Which one is true? Recently there was news about Bank of Korea’s foreign reserves. The news says that foreign reserves have decreased significantly from having $312billion to barely keeping $300billion <“South Korea Forex Reserves Fall by the Most in Almost 3years in September”>. The Hankyoreh’s data was right. Also, the Hankyoreh does not believe that the amount of short-term borrowings by financial institutions is low. It says short-term borrowing amounts to $101.5billion which it believes to be high. Foreign investors are buying speculative dollars expecting a great fall in the foreign exchange market and foreign investors who have already invested in the Korean stock market are now fleeing due to 11% decrease in the KOSPI index(Korean stock market index). The Hankyoreh says all of these incidents remind it of the Lehman Brothers collapse. It ends by quoting a commercial bank foreign exchange dealer. “If a Greek default comes to pass, we will go past 1,200, and we will probably go straight to 1,600 [won to the dollar].”