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COUNTRY REPORT South Korea North Korea The full publishing schedule for Country Reports is now available on our web site at http://www.eiu.com/schedule. 3rd quarter 1999 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1000 Tel: (1.212) 554 0600 Tel: (852) 2802 7288 Fax: (44.20) 7499 9767 Fax: (1.212) 586 1181/2 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Website: http://www.eiu.com Electronic delivery EIU Electronic New York: Lou Celi or Lisa Hennessey Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 London: Jeremy Eagle Tel: (44.20) 7830 1183 Fax: (44.20) 7830 1023 This publication is available on the following electronic and other media: Online databases NewsEdge Corporation (US) Microfilm FT Profile (UK) Tel: (1.718) 229 3000 World Microfilms Publications Tel: (44.20) 7825 8000 (UK) DIALOG (US) CD-ROM Tel: (44.20) 7266 2202 Tel: (1.415) 254 7000 The Dialog Corporation (US) LEXIS-NEXIS (US) SilverPlatter (US) Tel: (1.800) 227 4908 M.A.I.D/Profound (UK) Tel: (44.20) 7930 6900 Copyright © 1999 The Economist Intelligence Unit Limited. 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ISSN 1350-6900 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Contents 3 Summary 5 Inter-Korean relations South Korea 8 Political structure 9 Economic structure 10 Outlook for 1999-2000 15 The political scene 20 Economic policy 22 The domestic economy 22 Production and demand 25 Employment, wages and prices 27 Money and finance 31 Foreign trade and payments 34 Business news North Korea 37 Political structure 38 Economic structure 39 Outlook for 1999-2000 40 The political scene 44 The economy, trade and investment 47 Quarterly indicators and trade data List of figures 11 South Korea: forecast summary 12 South Korea: global assumptions 13 South Korea: current-account balance 14 South Korea: economic results and forecasts 20 South Korea: supplementary budget, Apr 1999 23 South Korea: gross domestic product by industry 24 South Korea: seasonally adjusted manufacturing production 24 South Korea: construction indicators 25 South Korea: employment 26 South Korea: wages in manufacturing industry 27 South Korea: price indicators, 1999 27 South Korea: money supply trends, 1999 EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 2 28 South Korea: non-performing loans by type of financial institution as of end-Mar 1999 29 South Korea: financial market indicators, 1999 30 South Korea: external liabilities 32 South Korea: exports of selected commodities, Jan-Mar 32 South Korea: imports of selected commodities, Jan-Mar 33 South Korea: current- and capital-account balances, Jan-Apr 47 South Korea: quarterly indicators of economic activity 48 South Korea: foreign trade 50 South Korea: structure of trade 51 South Korea: direction of trade List of figures 15 South Korea: gross domestic product 15 South Korea: won real exchange rates 23 South Korea: machinery orders 25 South Korea: manufacturing operation ratio index EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 3 July 23rd 1999 Summary 3rd quarter 1999 Inter-Korean relations The navies of the two Koreas clashed in early June. North Korean casualties were high. Hyundai’s cruises to North Korea were halted in late July after North Korea detained a southern tourist. Inter-Korean talks took place in Beijing but little was achieved. South Korea Outlook for 1999-2000 Constitutional reform will be deferred until after the April 2000 parliamentary election, but the ULD will not leave the government over the issue. Faster economic growth may persuade Kim Dae-jung to slacken the pace of economic reform. Real GDP will grow by 6.1% in 1999 and by 5.3% in 2000. Growth in 1999 will be driven largely by changes in stockbuilding. The foreign balance will exert a slight drag on growth in both 1999 and 2000. Growth in fiscal spending will slow. Interest rates may rise, but increases will be modest. Inflationary pressures will be muted as a result of excess capacity in the economy and a slack labour market. The current-account surplus will fall to 1.4% of GDP in 2000. The political scene The NCNP-ULD ruling coalition lost two by-elections in June, owing partly to a succession of scandals involving members of the government. In May Kim Dae-jung reshuffled his cabinet for the first time since taking office. Mr Kim visited Moscow in May, but few substantial issues were resolved. Economic policy A supplementary budget worth W2.8trn ($2.4bn) was passed by the National Assembly in April, the main purpose of which was to reduce unemployment. A second supplementary budget, centred on tax cuts and subsidies for low- and middle-income earners, was planned but its passage through parliament was blocked by the GNP. The Bank of Korea has continued to maintain downward pressure on short-term interest rates. The near-collapse of Daewoo in mid-July revealed the shortcomings of the government’s corporate reform programme. The domestic economy • Real GDP grew by 4.6% year on year in the first quarter of 1999. Private consumption rebounded and the contraction in gross fixed investment moderated. Exports of goods and services held up well. Manufacturing production grew by 12.6% year on year in the first quarter, confirming the recovery apparent in the fourth quarter of 1998. • Unemployment eased to 6.5% in May but remained high by pre-1997 levels. Employment in manufacturing rose by 3.7% between February and May. Wages in manufacturing rose by 12.6% year on year in April, largely as a result of increased overtime. Consumer prices rose by just 0.6% in June, but producer prices fell by 3.2% in the same month, both year on year. EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 4 • M3 growth remained near the government’s target of 13% for 1999 in January-April. Most domestic commercial banks returned to profit in January- June. Non-performing loans at domestic financial institutions rose by 8.5%, compared with the end-1998 level. The local stockmarket performed strongly, thanks partly to a revival of interest from domestic investors looking for higher returns than were available on bank deposits. Foreign direct investment commitments in January-April rose by 147.4% year on year. Foreign trade and The merchandise trade surplus (fob-cif) fell by 44.4% year on year in the first payments quarter of 1999, as imports rose by 8.1% and exports fell by 5.9%. The current- account surplus shrank by 39% year on year in January-April, owing to a reduced merchandise trade surplus and a widening services and income deficit. Business news The Hyundai-LG Big Deal business swap was concluded in mid-May, but the Samsung-Daewoo asset swap failed after Samsung Motors was declared bank- rupt. South Korea’s two largest life insurance companies, Samsung Life and Kyobo Life, will be listed. Sales of Korea First Bank and Seoul Bank have run into difficulties, owing to differences over asset valuations. North Korea Outlook for 1999-2000 Another Taepo-dong missile launch would undermine South Korea’s sunshine policy and could mean the end of KEDO. The Kosovo crisis will add to North Korea’s suspicions about the US’s intentions towards it. The political scene Some former vice-presidents may have been purged. William Perry visited Pyongyang in May but did not meet Kim Jong-il. India detained a North Korean freighter in July, claiming that it was carrying missile components bound for Pakistan. A senior North Korean delegation visited China in early June, becoming the first high-ranking delegation to do so since 1991. The economy, trade and Total merchandise trade fell in 1998 by 30% year on year, according to South investment Korea’s national unification ministry. North Korea’s stock of foreign debt rose to $12bn at the end of 1997. The 1999 harvest could be poor. Lack of main- tenance may have led to a deterioration in the national system of piped potable water. The first North Korean-built railcars for Hyundai arrived in Inchon in late May.