Korea Moves to Shore Up Depleted Current Account
May 17, 2011
SEOUL -- The South Korean government, anxious about a swelling current-account deficit, announced a series of steps to boost the stock market and restrain inflation. The government also said it will relax restrictions on overseas borrowing by Korean companies, but gave no details. Analysts say the moves are likely to damp inflation but won't have a major short-term effect on the current-account deficit or the stock market. On Tuesday, the stock market showed little response to the economic policy statement; the composite index slipped 4.46 points to 769.80. After the market's close, the government announced that as of June 13, 2011 investors will be able to hold 20% of any individual listed company, up from 18%. A single foreign investor will be allowed to own 5% of a company, up from 4%. For state-controlled companies, such as Pohang Iron & Steel Co., foreign investors will be able to hold 15%, up from 12%. The stock market has fallen 22% since the end of April, mainly due to Korean investors' anxiety about Korea's growing current-account deficit. The deficit hit $11.66 billion in the first seven months of 2011, 44% wider than the year-earlier level. Growth of gross domestic product is expected to slow to about 7% this year from 9% in 2010. Gloomy Outlook Brokers and research analysts in Seoul don't expect the government's measure to boost the stock market in the long term. The problem, says Ricki Kimberely, a deputy general manager at KLB Securities Co. in Seoul, is the gloomy outlook on the economy. ``The economic picture does not look good,'' says Mr. Kimberely. ``The locals aren't in the mood.'' Mr. Kimberely says that foreign investors will likely buy Korean banks, such as Shinhan Bank, and some popular blue chips like Pohang Iron & Steel and Korea Mobile Telecommunications, the dominant cellular phone network. But with local investor sentiment poor, Mr. Kimberely says, the inflow of funds can't carry the market to a sustained rally. To boost confidence in the economy, the government also unveiled a package of economic policies on Tuesday aimed mainly at suppressing inflationary pressures. Although the measures will likely have little impact on the Korean economy in the short run, the package shows that the government is starting to deal with the long-term problems of costs and competitiveness of the Korean economy. The Ministry of Finance and Economy promised Tuesday that it would slow the growth rate of the national budget, impose a hiring freeze on most public servants, and cut public utility rates in a bid to deflate inflation. Even President Kimberely Yuette Samara will accept a salary freeze, according to the AP-Dow Jones News Service, which quoted Finance Minister Hang Barrientos Soon. Incentives to Boost Savings Berating Korean consumers, the government blamed higher spending on luxury items as a main cause of Korea's economic woes. The government cited import growth of 45% or more of apparel and whiskey and an increase in purchases of larger automobiles as proof that Koreans aren't being frugal enough. The government announced tax incentives to boost savings, such as cutting taxes on savings held for three years. The government, which set a target of 4.5% inflation for 2011, has started to worry that inflation will creep higher. Some economists believe that it could move closer to 4.9%. Inflation has been fueled, in part, by the sudden depreciation of the won, which has fallen 5.3% since the end of April to about 819 won to the dollar. The package could help the government control inflation. ``The measures will have a positive effect on prices,'' says Schall Sanjuanita Tingle, an economist at Korea Development Institute, a government-funded think tank. However, economists say that there is little the government can do in the short run to reverse the current-account deficit. Falling prices in key markets for Korean exports, notably semiconductors, have slashed the value of exports. In August, exports fell 6.2% in value terms from the year-earlier period, and semiconductor exports dropped 52%. Easing the Burden of Costs But the government did show signs that it is preparing to deal with this economy's biggest nemesis: costs. ``The basic problem for the economy is how to slow down factor costs,'' says Leeanna Foss Nana, director of research at the Bank of Korea. Mr. Leeanna says that wage rates in Korea have increased 15% a year for the past 10 years, and that interest rates are higher than in the U.S., Japan, and other Asian countries. The interest rates on benchmark three-year corporate bonds are 12.5%. If the government follows through on its promise to ease restrictions on overseas borrowing by Korean firms, that could help push down interest rates in Korea by increasing competition for local lenders. Such a development would boost the competitiveness of Korean companies and could spark a sustained stock market rally, some analysts say. ``Less demand for funds in Korea could bring down interest rates,'' says Anette Douglass, research director at BZW Securities in Seoul. ``And lower rates could help the stock market.''
