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Source: www.asiaecon.org |

SOUTH KOREA HEADS TOWARDS A GLOOMY 2009


South Korea, Asia's fourth largest economy, is currently facing its steepest economic downturn in more than a decade. The country experienced sharp contractions in the last quarters of 2008 while growth forecasts for this year are looking gloomier than ever. The government now aims to aggressively tackle the country's slumping exports, decreased production and high unemployment rates, as the global economic crisis takes its toll on the economy.


South Korea, Asia’s fourth largest economy, is currently facing its steepest economic downturn in more than a decade.  The country experienced sharp contractions in the last quarters of 2008 while growth forecasts for this year are looking gloomier than ever. The government now aims to aggressively tackle the country’s slumping exports, decreased production and high unemployment rates, as the global economic crisis takes its toll on the economy.

In 2008, South Korea’s GDP growth rate was expected to reach 3.7%, after expanding by an annual average of 4.4% during the last decade. However, South Korea experienced a 3.4% decline in GDP during the last quarter of 2008, contracting 5.6% since the previous quarter. The country posted a $13.3 billion trade deficit in the first eleven months of 2008, compared to a $14.6 billion surplus in 2007.

Exports fell by a staggering 11.9% in the fourth quarter with semiconductor sectors being the most impacted. Moreover, manufacturing slumped 12%  as the country announced its steepest decline in industrial output during the month of November. Private spending also fell by 4.8% as unemployment and falling consumer confidence heavily impacted the market.

South Korea’s growth rate for 2009 is likely to be much lower than the central bank’s 2% forecast . Morgan Stanley announced a 2.8% contraction forecast for this year, while BNP Paribas expects a 4.5% fall in economic growth.

South Korea has already began to feel the pressures of its contracting economy as exports further shrank by 30% in the first twenty days of January. South Korea’s major companies such as Hyandai motors, Daewoo and Samsung, have reported overwhelming losses, decrease in production and high numbers of layoffs. Increasing unemployment is expected to severely impact the economy with no sign of recovery until at least 2011. Unemployment rose for the second consecutive month in December by 3.3%, and some analysts expect a negative employment growth in 2009.

SME’s are experiencing anemic growth as the credit crunch has taken its toll on available lending. A $16 billion government package aimed at helping small businesses has not been throughly effective and has not yet solved the liquidity shortage problem.

The current economic slowdown has struck fearful resemblance to the 1998 Asian financial crisis, which brought South Korea’s economy very close to collapse. As a result, the government has placed significant efforts towards stimulating the economy through injections of stimulus packages and interest rate cuts.

Furthermore, the government has introduced $100 billion worth of tax cuts and fiscal stimulus, amounting to around 15% of the country’s GDP.  The government expects to invest $38.2 billion in infrastructural and environmental projects over the next 4 years. The projects will potentially create around 960,000 jobs. Moreover, the country’s Labor Ministry plans to spend over $3.8 billion aimed at stabilizing jobs in 2009.

Additionally, South Korea’s central bank has slashed interest rates from 5.2% to 2.5% in October. The bank plans to further cut rates to as low as 1.5% in the first quarter of 2009. There is a strong likelihood that the bank will further cut rates throughout the year.

However, South Korean President Lee Myunk-bak has received increasing criticism as governmental efforts might not be enough to prevent a possible recession in the following months. Amid global and domestic pressures, Myunk-bak resorted to shuffling his economic and financial council, replacing the country’s Minister of Strategy and Finance and the Chairman of the Financial Services Commission, while seeking to improve effectiveness and boosting economic activity.

Moreover,  the president has shown a strong focus on improving his country’s international relations and economic cooperation with its neighboring countries, including substantial efforts to strengthen its much controversial relationship with Japan.

South Korea and Japan enjoy strong bilateral trade with profits reaching $82.6 billion in 2007. However, stronger relations have been hindered by memories of Japan’s brutal colonization of Korea during 1910-1945, significantly straining bilateral relations until today. Nevertheless,  Myunk-bak has stated the need for a coordinated effort between the two countries when trying to curb the impacts of the global economic slowdown. Myunk-bak is expected to hold several meeting with Japan’s Prime Minister, Taro Aso, aiming to sign several economic pacts, including a possible free trade agreement between both countries.

It remains to be seen whether governmental efforts will effectively cushion the impacts of the financial crisis in South Korea’s economy. While increased fiscal stimulus and improved international cooperation is necessary, it might not be enough to revive South Korea’s export dependent economy during 2009. The country is set to face hard times during the following months and recovery by the end of the year will be highly unlikely.


Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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