Monday, December 24, 2007

Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.

Credit crunch, did someone use the expression credit crunch?

South Korean Q4 2007 Consumer Confidence

South Korea's consumer confidence declined from a five-year high, signaling spending may slow and crimp growth in Asia's fourth-largest economy. The sentiment index fell to 106 in the fourth quarter, the lowest in three quarters, from 112, the Bank of Korea said today in a report in Seoul. A reading higher than 100 indicates optimists outnumber pessimists.

The benchmark Kospi index of stocks has fallen 8 percent from a Nov. 1 record of 2085.45 on concern U.S. subprime-related losses will slow the global economy. Lehman Brothers Holdings Inc. this month cut its 2008 growth forecast for South Korea to 4.6 percent from 4.7 percent.

The yield on a five-year government bond rose 2 basis points to 5.87 percent at 3:00 p.m. in Seoul and the won gained 0.1 percent to 939.65 versus the dollar. The Kospi climbed 2.2 percent.

Confidence fell as ``sentiment on living conditions and the local economy weakened,'' the central bank said. ``The number of consumers with a negative view on the economy rose sharply.''

South Koreans' debt-servicing costs have climbed steadily as the central bank has pushed borrowing costs to a six-year high. The Bank of Korea raised rates in July and August to curb household debt that topped 600 trillion won ($640 billion) for the first time in September.

Friday, November 2, 2007

Land of the Rising Won

From Bloomberg this morning:

South Korean Finance Minister Kwon Okyu said the nation's exporters will cope with the won's surge against the dollar, helping economic growth accelerate next year.

The won reached a decade-high this week and companies such as Hyundai Motor Co. say it will climb further, forcing them to cut costs to boost earnings. Kwon, who expects the won's rally to run out of steam, said rising shipments and a pickup in domestic demand mean the economy will grow 4.8 percent in 2007 and 5 percent next year.

``Even with global dollar weaknesses, Korean exports will continue their robust growth,'' Kwon, 55, said in an Oct. 29 interview in Gwacheon, near Seoul. ``Our competitiveness nowadays doesn't depend on price competition, rather it depends on the quality, technology and so on,'' he said.

Samsung Electronics Co., South Korea's biggest exporter, this year surpassed Motorola Inc. to become the world's second- largest maker of mobile phones behind Nokia Oyj as it focused on more expensive handsets. Exports climbed to a record in October as higher shipments to China and Europe helped cushion the $887 billion economy from a slowdown in U.S. demand.

``Korean exporters have successfully diversified their markets and enhanced their product quality,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``As a result, Korean firms are better placed to weather shocks in individual overseas economies than in the past.''

Chinese Partner

Exports to China surged 33.1 percent in the first 20 days of October from the same period a year earlier, the Commerce Ministry said yesterday. China replaced the U.S. as South Korea's biggest export market in 2003.

Gross domestic product expanded 5.2 percent in the second quarter from a year earlier, the fastest pace in almost two years. The economy has grown in each quarter since the second three months of 2003, the longest continuous expansion since one that ended in 1992.

Between the beginning of 2004 and the end of 2006, South Korea's won climbed 28 percent, making it the biggest gainer among the 10 most actively traded Asian currencies tracked by Bloomberg. Exports, which account for 40 percent of GDP, have grown 19 percent a year on average in the same period.

The won fell 0.4 percent to 907.20 against the dollar at 12:09 p.m. in Seoul.

Kwon yesterday told parliament that the government will continue to buy or sell the currency to curb speculation.

Currency Speculation

``The government is clearly committed to blocking any speculative move'' in the foreign-exchange market, Kwon said at a parliamentary hearing.

Kwon's comments on exporters and the won contrast with those of Kim Dong Jin, Hyundai Motor's vice chairman, who said this week the currency's advance is the ``No. 1 obstacle'' for South Korea's third-biggest exporter.

Kwon and Kim also disagree on the currency's direction. Hyundai's Kim sees further gains. Kwon reiterated his view the currency's advance will cease because demand will fall along with the nation's current account surplus.

``I don't think the currency has reason to appreciate further because the rate is determined by supply and demand,'' Kwon said. He predicts South Korea's current account surplus will drop to zero this year as more Koreans travel and invest overseas, reducing demand for won.

The Bank of Korea estimates the surplus this year will be $2 billion, down from $6 billion in 2006. The government earlier this year relaxed regulations so that individuals can invest more overseas. Some foreign exchange traders said a shrinking current-account gap probably won't be enough to curb the won.

`Wishful Thinking'

``It's wishful thinking to expect a current account deficit to curb the won's gains,'' said Kim Tae Wan, a Seoul-based currency dealer with Kookmin Bank, South Korea's biggest lender. ``New Zealand and Australia have huge deficits but their currencies are rocketing.''

Australia has recorded a current account deficit each quarter since 1973 with the shortfall climbing to a record A$16 billion ($14.6 billion) in the second quarter. The Australian dollar has surged 16 percent this year to a 23-year high. New Zealand's current account gap is 8.2 percent of gross domestic product and its currency has gained 8 percent this year.

Kwon said South Korea's rising demand for electricity gives him confidence to predict a rebound in domestic demand after a slowdown in the second quarter.

Electricity sales climbed 4.2 percent in September, after gaining 6.1 percent in August and 6.6 percent in July, according to Korea Electric Power Corp.

``Electricity demand is still increasing substantially,'' Kwon said. ``That means overall sentiment isn't that bad.''

Kwon said there are still risks to growth, including the U.S. housing recession and record oil prices.

A U.S. slowdown would be mitigated by rising exports to China and India, while the current oil price is ``endurable,'' he said.

The price of crude oil climbed beyond $96 a barrel for the first time yesterday and has surged 57 percent this year. South Korea imports almost all of its oil from abroad.

Sunday, September 2, 2007

South Korea Q2 2007 GDP

From Bloomberg today:

South Korea's Economy Expands 1.8 Percent on Exports

South Korea's economy expanded at the fastest pace in almost four years in the second quarter, helped by rising exports, according to revised figures released today.

The economy grew 1.8 percent, the quickest since the fourth quarter of 2003 and more than the initial estimate of 1.7 percent, the Bank of Korea said in Seoul. From a year ago, the expansion was 5 percent, up from July's estimate of 4.9 percent.

Rising overseas demand helped the country sustain the longest stretch of growth in a decade. Overseas shipments account for two-fifths of gross domestic product and orders from South Korea's biggest market, China, have more than compensated for a slowdown in the U.S.

``Growth is likely to remain resilient amid healthy exports and a pickup in domestic demand,'' Go You Sun, an economist at Daewoo Securities Co. in Seoul, said before the report was released. ``The economy will perform well through next year.''

Exports grew at the fastest pace in six months in July, a previous report showed. China's economy expanded 11.9 percent in the second quarter, the fastest pace in more than 12 years.

South Korea shows few signs of being affected by the fallout from the U.S. housing recession, Vice Finance Minister Kim Seok Dong said Aug. 30. Moody's Investors Service last month raised the nation's debt rating to A2, the sixth-highest investment grade.

Stocks rose and the currency fell. The benchmark Kospi index of stocks gained 0.3 percent to 1878.56 at 9:34 a.m. in Seoul. The won fell 0.02 percent to 938.45 against the dollar.

Exports, Consumption

Exports of goods rose 5.2 percent in the second quarter, matching the earlier estimate, today's report showed. Private consumption gained 0.8 percent, also unchanged from the earlier estimate. Business investment climbed 3.4 percent. Construction investment dropped 1.3 percent, less than the 1.4 percent decline earlier estimated.

The services industry expanded 1.3 percent in the second quarter from the first, compared with the previous estimate of 1.1 percent. A 22 percent gain in the country's stock index in the first six months of this year helped boost demand for financial products, today's report showed. The financial and insurance sector expanded 5.1 percent from the first quarter, up from the previous estimate of 3.6 percent.

Hyundai Motor Co., the country's largest automaker, said local sales jumped 88 percent and exports climbed 53 percent in July. Samsung Heavy Industries Co., the world's second-largest shipbuilder, has received $14.5 billion in orders this year, 97 percent of its annual goal of a record $15 billion.

2007 Growth Forecast

The central bank's 2007 GDP growth forecast of 4.5 percent remains ``valid,'' Ahn Kil Hyo, a central bank official said at a press briefing in Seoul.

Manufacturing expanded 3.6 percent in the second quarter from the first, matching the previous estimate. Manufacturers' confidence is at a 17-month high and factory production climbed seven times faster than expected in July.

Still, interest-rate increases may stifle spending. The Bank of Korea raised borrowing costs for the second time in two months on Aug. 9, bringing the benchmark rate to a six-year high of 5 percent.

``Two interest-rate hikes and sharp corrections in equity markets at home and abroad will eventually work against consumer spending unless household income growth unexpectedly accelerates,'' said Lim Jiwon, an economist at JPMorgan Chase & Co. in Seoul.

The benchmark Kospi index has fallen 6.5 percent since setting a record on July 25. For the year it has gained 31 percent.

Wednesday, August 29, 2007

Industrial Output Rises Rapidly

From Bloomberg today:

South Korean Factory Output Jumps on Chips, Phones

South Korea's industrial production rose seven times faster than expected in July as companies increased output of semiconductors and mobile phones.

Manufacturing grew 2.1 percent from June, when it gained 1.9 percent, the statistics office said today in Gwacheon, South Korea. The median forecast in a Bloomberg News survey of 11 economists was for a 0.3 percent increase.

An increase in output may help to protect Asia's third- largest economy from a slowdown in consumer spending after the benchmark stock index fell from a record and the central bank raised interest rates twice in two months. Overseas shipments, which account for about 40 percent of the $887 billion economy, rose at the fastest pace in six months in July.

``Upbeat export momentum will keep the economy chugging along,'' said Kim Jae Eun, an economist at SK Securities Co. in Seoul. ``The economic recovery will remain unscathed for the moment.''

The won closed at 942 per dollar at 3 p.m. in Seoul, down 0.2 percent. The yield on three-year government bonds fell 2 basis points at 5.34 percent.

From a year earlier, industrial output climbed 14.3 percent in July, the fastest pace in 10 months, up from a 7.7 percent increase in June.

Production last year was depressed by strikes at Hyundai Motor Co. and its affiliate Kia Motors Corp. Auto shipments fell almost a third in July 2006. Car production jumped 38.1 percent in July from a year ago. From June, auto production declined 8.4 percent in July, today's report showed.

Semiconductors, Mobile Phones

Production of semiconductors rose 4.9 percent from June and mobile-phone output climbed 9.5 percent, both on rising demand from overseas buyers, today's report showed.

Semiconductors and mobile phone are ``two important sectors in assessing the impact of any U.S. slowdown on Asia,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. Mobile-phone demand shows an ``ongoing strength in consumer spending'' as the appetite for new model handsets tend to be discretionary.

Sales of consumer goods rose 1.6 percent from June. Corporate investment on facilities climbed 1.3 percent from a year ago.

Factory output may slow in coming months if South Koreans spend less after the central bank raised interest rates twice this year and local stock prices declined.

The benchmark Kospi stock index has dropped 8.9 percent since setting a record on July 25 on concern a U.S. housing recession would spread and slow global growth.

``The clear risk to what is a very optimistic outlook on South Korea at present is the increased likelihood of a more substantial slowing in U.S. economic activity,'' Maguire said.

The Bank of Korea lifted borrowing costs for a second time in two months on Aug. 9, bringing the benchmark rate to a six- year high.

Construction orders dropped 14.9 percent in July from a year ago, as there were fewer orders to build homes.

Wednesday, August 8, 2007

Bank of Korea Raises Rates

The Financial Times this morning:

Bank of Korea surprises with rate increase

By Song Jung-a in Seoul

Published: August 9 2007 06:48 | Last updated: August 9 2007 06:48

The Bank of Korea unexpectedly raised its benchmark interest rate by a quarter point to a six-year high of 5 per cent on Thursday to absorb excessive market liquidity and contain growing inflationary pressure.

The rate hike, the first ever to follow just a month after a previous hike, surprised South Korea’s financial markets, driving bond prices down and pushing the won higher.

Lee Seong-tae, the BoK governor, said strong economic growth and increasing price pressure prompted the central bank to raise interest rates again as financial markets showed signs of instability amid explosive growth in the money supply.

South Korea’s economy grew 4.9 per cent in the second quarter, the fastest pace in over a year, beating economists’ expectations. The strong growth was propelled by robust exports, which jumped 20 per cent in July from a year earlier, and industrial output rose 7.6 per cent in June.

Mr Lee hinted that further tightening is unlikely this year, saying that ”the degree of financial accommodation will be markedly reduced” with the two consecutive rate hikes. And he cautioned that inflationary pressure would increase in the second half, due to a recovery in domestic demand and higher oil prices.

Bank loans to households increased by Won1,770bn in July from June, the biggest monthly gain in five months. Lending to small and mid-sized companies rose by Won3,100bn in July, increasing the risk of an asset bubble. Inflation remained stable at 2.5 per cent but Mr Lee predicted that upward pressure would grow in coming months.

Kwon O-kyu, the finance minister, supported the BoK’s move, saying the economy was showing ”clearer signs” of a recovery on the back of stronger consumption and brisk exports. ”The economic recovery, which started gradually from the beginning of the year, is becoming clearer,” he told reporters.

Both Mr Lee and Mr Kwon maintained their upbeat economic outlook, saying that the upward trend will continue in the second half, although higher oil prices and the stronger won still pose risks to economic growth. The BoK has forecast Asia’s third-largest economy to grow 4.5 per cent this year after expanding by 5 per cent last year.

Financial markets showed a sharp reaction to the surprise rate hike Thursday. The yield on the benchmark five-year government bond surged 7 basis points to a two-week high of 5.4 per cent and the won rose 0.2 per cent to 922.15 against the dollar in morning trading. The Kospi benchmark stock index pared gains to 0.6 per cent after being up as much as 1.3 per cent before the announcement.

and Bloomberg:

Bank of Korea Unexpectedly Raises Key Rate to 5%

The Bank of Korea unexpectedly raised its benchmark interest rate for a second time in as many months to curb lending that may fuel asset-price bubbles.

Governor Lee Seong Tae and his board increased the overnight call rate by a quarter point to 5 percent, the highest since July 2001, the central bank said in Seoul today. None of the 14 economists surveyed by Bloomberg News predicted the move.

Finance Minister Kwon Okyu said the decision was ``appropriate.'' He and Lee want to avoid a repeat of a debt bubble that burst in 2004 and stunted economic growth. Lending to households rose at the fastest pace in five months in July.

``The tipping point is likely to have been the explosion in household borrowing over July,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. ``The crippling debt overhang of 2001-03 remains clear in the mind of the central bank.''

In 2004, borrowers who had used credit cards to amass debt defaulted in record numbers, slowing the economy's expansion.

The yield on the benchmark five-year government bond surged 10 basis points to 5.43 percent as of 1:50 p.m. in Seoul, the biggest jump since October 2005. The won rose 0.2 percent to 922.32 per dollar. The Kospi stock index pared gains to 0.3 percent after rising as much as 1.3 percent before the decision.

Economists had expected the bank to keep rates on hold to assess the effect of the July increase and monitor whether a U.S. subprime mortgage slump will affect global growth. Today's move was the bank's first-ever back-to-back rate increase.

Urgent Task

``Concerns over soaring money growth outweighed U.S. sub- prime woes,'' said Kim Jae Eun, an economist at SK Securities Co. in Seoul. ``The most urgent task for the Bank of Korea is to put a lid on rising money growth and ensure fast growth won't cause asset-price bubbles and inflation.''

The Bank of Korea also raised the rate on so-called aggregate loans, which are offered to local banks to spur lending to smaller firms, to 3.25 percent from 3 percent.

``With a series of accumulated rate hikes, the degree of monetary easing that was supportive of the economic recovery has lessened considerably,'' Governor Lee told reporters in Seoul.

Lending by commercial banks to households surged 1.77 trillion won ($1.9 billion) in July from June, the central bank said yesterday. Loans to small and mid-sized businesses rose 3.1 trillion won, slowing from June's 8.1 trillion won gain, which was the biggest increase since December 2000.

Further Moves

``Given the hawkish tone of the central bank, a further tightening move before year-end cannot be ruled out,'' said Frederic Neumann, an economist with HSBC Markets Ltd. in Singapore. ``However, this will become dependent on trends in credit and liquidity growth over the next few months.''

Neumann maintained his prediction that lending and money supply will slow in response to credit-tightening measures and the key rate will stay at 5 percent for the rest of the year.

Central banks globally are battling to curb inflation as booming world economic growth forces up food and commodity prices. Australia raised its key rate to an 11-year high of 6.5 percent yesterday, and England, Canada and New Zealand all increased borrowing costs in the past month. European Central Bank President Jean-Claude Trichet said last week he may raise his benchmark rate from 4 percent next month.

South Korea's consumer-price inflation advanced 0.4 percent in July from June, when it was unchanged. The annual inflation rate remained at 2.5 percent. Consumer prices will climb 2.6 percent in the second half of 2007, accelerating from 2.2 percent in the first half, the central bank said last month.

Economic Revival

Growing signs of economic revival strengthened the case for a rate increase.

Consumer confidence climbed to the highest in 16 months in July, the National Statistical Office said today, signaling shoppers may help to sustain the economy's longest expansion in a decade. Consumer spending is showing a mild recovery, the central bank said today.

The economy expanded 1.7 percent in the three months to June 30, the quickest rate in 18 months. Exports gained 20 percent in July, while in June, service companies expanded at the quickest rate in almost five years and industrial production climbed for a third month.

``The Bank of Korea might think that hiking rates sooner than expected gives them room for a rainy day in the future,'' said Kwon Young Sun, an economist with Lehman Brothers Inc. in Hong Kong. ``Without any significant upside risks to growth, the bank should stay on hold for the rest of the year.''

Today's rate increase came even as South Korea's currency, the won, has strengthened. The won has surged to a 10-year high against the yen, the currency of its major export competitor.

Governor Lee said today that the won's strength will have little effect on easing inflationary pressure. Finance Minister Kwon said last week that the yen's weakness isn't justified. Borrowing in yen to buy higher-yielding assets -- the so-called carry trade -- threatens to destabilize global markets, he said.

The central bank last week introduced measures to restrict companies from borrowing in foreign currencies as it seeks to reduce the won's gains.

Borrowing in S Korea

In Bloomberg today:

South Korea's Household Debt Grows at Fastest Pace in 5 Months

By Kim Kyoungwha

Aug. 8 (Bloomberg) -- South Korea's household debt grew at the fastest pace in five months in July, increasing pressure on the central bank to raise interest rates for a second time this year.

Lending by commercial banks to households surged 1.77 trillion won ($1.9 billion) from the previous month, the biggest rise since February, the Bank of Korea said in Seoul today. The gain was more than double a 776 billion won increase in June.

A resurgence in household borrowing may persuade central bank Governor Lee Seong Tae and his board to increase the benchmark interest rate from a six-year high. Policy makers raised the key rate to 4.75 percent last month on concern a jump in lending may spur inflation as economic growth accelerates.

Lee and his policy makers meet at 9 a.m. in Seoul tomorrow and an interest-rate decision is due before 11 a.m.

All 14 economists surveyed by Bloomberg News expect the bank will leave the rate at 4.75 percent. Still, nine of 14 analysts see a quarter-point increase to 5 percent later this year.

Lending to small and mid-sized businesses rose by 3.1 trillion won in July, slowing from June's 8.1 trillion won gain, which was the biggest monthly increase since the bank began compiling the figures in December 2000.

Mortgage lending advanced 127.4 billion in July, after climbing 710 billion won in June, today's report showed.

Lee and Finance Minister Kwon Okyu say that excessive lending and money-supply growth could push up prices and result in an asset bubble, undermining the economy's longest expansion in a decade.

In an effort to slow borrowing, the central bank on June 21 reduced the funds it makes available for loans to small businesses for the first time in six months. Last year, the bank ordered commercial lenders to hold more money as reserves.

Lf, the broadest measure of the money supply and formerly known as M3, rose an estimated 10.4 percent in June from May, the central bank said, citing preliminary figures. Lf stands for liquidity of financial institutions.

Tuesday, July 31, 2007

South Korean Exports

From Bloomberg:

South Korea's Export Growth Seen Accelerating; Prices May Rise

uly 31 (Bloomberg) -- South Korea's exports probably rose at the fastest pace in almost three years in July, stoking economic growth. Consumer prices likely increased from June.

Overseas shipments surged 21 percent from a year earlier, according to the median estimate in a Bloomberg News survey of 11 economists. That would be the biggest gain since November 2004. Consumer prices advanced an unadjusted 0.3 percent from the previous month, the survey showed. Trade will be released at 10 a.m. in Seoul on Aug. 1 and the prices report at 1:30 p.m.

Rising exports have driven 17 consecutive quarters of growth in Asia's third-largest economy, the longest expansion in more than a decade. Increased overseas demand is stoking sales of LG Electronics Inc. mobile phones, Kia Motors Corp. cars and Hyundai Heavy Industries Co. ships.

``Strong exports and imports would suggest continued growth momentum in the second half this year,'' said Oh Suktae, an economist at Citibank Korea Inc. in Seoul. ``We continue to focus on the performance of the semiconductor and shipbuilding sectors as potential drivers of export strength.''

South Korea's economy expanded 1.7 percent in the second quarter from the previous three months, the central bank said last week, more than the 1.3 percent median estimate in a Bloomberg News survey of economists. That was the strongest rate since the fourth quarter of 2005.

Hyundai Heavy, the world's largest shipyard, said on July 27 it received an order for eight large-sized container vessels valued at 1.21 trillion won ($1.3 billion), its biggest contract this year.

Global Growth

Signs of faster global expansion will keep boosting demand for South Korea's exports, which make up 40 percent of the economy. The International Monetary Fund last week raised its forecast for world growth, downplaying the risk of a U.S. credit crunch crippling economic expansion.

The global economy will expand 5.2 percent in 2007 and 2008, the Washington-based IMF said, more than the 4.9 percent it predicted for both years in April.

South Korea's consumer prices climbed 0.3 percent from June, when they were unchanged, the Bloomberg News survey showed.

``Rising oil prices continue to push up the cost of industrial goods, and a modest recovery in consumption suggests upward pressure on service costs,'' Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong, wrote in a report. ``A counteracting force will be falling prices for agricultural, livestock and fishery products.''

Annual Inflation

The annual inflation rate stayed unchanged at 2.5 percent in July, according to the survey of economists. That would be at the lower end of the central bank's target range of between 2.5 percent and 3.5 percent.

The Bank of Korea raised its overnight call rate target on July 12 to a six-year high of 4.75 percent on concern record lending to small companies may spur inflation. Ten of 11 economists say the bank will increase the benchmark rate to 5 percent by December.

The following tables show economists' estimates for the change in exports and imports in July from a year earlier and unadjusted consumer prices from the previous month and from a year earlier:

Tuesday, July 24, 2007

Moody's Upgrade Sovereign Rating

From Bloomberg this morning:

South Korean Won Rises to Highest Since 1997 on Growth, Moody's

July 25 (Bloomberg) -- The South Korean won rose, matching the highest since 1997, after economic growth accelerated to the fastest in 1 1/2 years and Moody's Investors Service upgraded the country's debt ratings.

Government and central bank concerns that the won's 1.7 percent advance this year would hurt exports may prove unfounded as overseas shipments gained 5.2 percent in the second quarter, nearly double the 2.7 percent increase in the prior three months. Moody's raised the sovereign rating one level to A2, citing ``fiscal prudence.''

``Whilst we don't expect any sharp moves on the back of a stronger economy the won can go stronger,'' said Magnus Prim, a senior foreign-exchange strategist at Skandinaviska Enskilda Banken in Singapore. ``Though the view from the authorities is that they don't want it too much stronger.''

The currency rose as much as 0.1 percent to 913.00, matching the level reached Dec. 7 that was the highest since October 1997. It traded at 913.35 as of 1:52 p.m., according to Seoul Money Brokerage Services Ltd. The currency may strengthen to 910 in one month, said Prim.

Vice Finance Minister Kim Seok Dong warned July 19 the government is ``focusing'' on gains in the won.

Korea's economy expanded 1.7 percent from the first quarter, the Bank of Korea said in Seoul today, faster than the 1.3 percent median estimate of 11 economists in a Bloomberg News survey. From a year earlier, the economy grew 4.9 percent.

Moody's Rating Upgrade

The ratings upgrade comes after Moody's put the nation under review July 3. The move puts South Korea's rating on par with China, Hungary and Israel. A higher debt rating signals a lower risk of debt default and may help reduce South Korea's borrowing costs.

Benchmark five-year bond yields, which move inversely to the price, declined 2 basis points to 5.45 percent, according to Korea Exchange. The price of the 4 3/4 percent note due March 2012 rose 0.09, or 9 won per 10,000 won face amount, to 98.94.

``Yields aren't moving much because investors are taking a wait-and-see attitude after the recent rate increase by the central bank,'' said Lee Yong Gyoo, a general manager at Hanwha Securities Co.'s fixed-income management team. ``This may continue until the release of key economic data later this month.''

The Bank of Korea July 12 raised its benchmark interest rate for the first time in a year to 4.75 percent on concern record lending to small- and mid-sized companies may spur inflation.

Q2 GDP Growth

From the Financial Times:

Strong exports boost S Korea GDP Growth

The South Korean economy expanded at a much faster rate than expected in the second quarter, growing by 4.9 per cent compared to a year earlier, increasing the likelihood of further interest rate rises.

The acceleration – from an annual rate of 4 per cent in the first quarter – was largely due to robust exports and capital investment, according to preliminary date from the Bank of Korea released on Wednesday.

“Today’s data strengthens the case for another rate hike by the Bank of Korea, taking the benchmark rate to 5 per cent from 4.75 per cent currently,” said Frederic Neumann, Korea economist at HSBC.

“Even if there are few evident inflationary pressures, policy-makers continue to be concerned over loan growth and the strong output figure should lessen concerns that tighter monetary policy would derail the recovery,” he said.

Earlier this month the central bank raised interest rates for the first time in 10 months, citing inflationary pressure and abundant liquidity in Asia’s third largest economy.

The Bank of Korea data showed the quarterly rate of gross domestic product growth accelerated from 0.9 per cent in the first three months of the year to 1.7 per cent in the latest period, the fastest rate in 18 months. It was much higher than the 1.3 per cent consensus forecast of economists polled by Reuters.

The benchmark Kospi index, which briefly crossed the 2,000 mark on Tuesday to hit a record high, declined 1.12 per cent, to 1,969, when the Seoul stock market opened on Wednesday morning, largely due to profit-taking.

The Korean won, which was trading near a seven month high on Tuesday, also weakened slightly, trading at Won914.65 to the US dollar.

The GDP increase was due to strong growth in exports – they were 5.2 per cent higher in the second quarter, almost double the rate of the previous three months – and the sound performance of the service sector, which grew by 1.1 per cent, only slightly slower than the 1.2 per cent expansion in the preceding three months.

“The second-quarter growth was marginally higher than our expectations, and the economy seems to have reached the upper end of the bank’s target range of growth,” said Lee Kwang-june, director of the central bank’s economic statistics division.

“In the third quarter, the economy will continue to expand, but the quarterly growth is not likely to be as high as 1.7 per cent,” he told reporters.

The central bank and the government this month raised growth forecasts for this year to 4.5 per cent and 4.6 per cent respectively, and with the Bank of Korea operating a conservative monetary policy, further rate rises are expected.

However, some economists have warned this could choke off the nascent recovery. The economy remains in a fragile position, with the strong Korean currency – the won has gained 1.2 per cent against the dollar and 3.3 per cent against the Japanese yen so far this year – continuing to hurt exporters. Meanwhile, the domestic recovery has yet to get properly under way.

The Won Keeps rising

From Bloomberg:

Won Rises to Strongest This Year

By Jake Lee

July 24 (Bloomberg) -- South Korea's won rose to the strongest this year before a government report tomorrow that may show the economy grew at the fastest pace in 1 1/2 years.

The won has risen 1.1 percent this month as the Kospi index advanced to a record and the central bank and government raised their growth forecasts. The Bank of Korea may allow the won to appreciate faster as a 2.4 percent rally in Japan's currency against the dollar this month eased concern exporters will lose competitiveness.

``We're bullish on the won and think it can keep getting stronger,'' said Catherine Tan, head of emerging markets at Forecast Singapore Ltd. ``The economy is doing well and the market is now looking at the growth report tomorrow.''

The won rose as much as 0.1 percent to 913.90 against the dollar, the strongest since Dec. 7, before closing at 914.10 at 3 p.m., according to Seoul Money Brokerage Services Ltd. It may rise to 910 by year-end, Tan said. The won has risen 1.7 percent this year against the dollar and 3.1 percent versus the yen.

The currency has ``gained a lot,'' Vice Finance Minister Kim Seok Dong said July 19, adding that the share market had risen at a ``drastic'' pace. A stronger won may hurt exports, which account for 40 percent of the economy, by making Korean goods more expensive compared with those of regional rivals.

Asia's third-largest economy expanded 1.3 percent from the first quarter, according to the median estimate of 11 economists surveyed by Bloomberg News. The gross domestic product report will be released at 8 a.m. in Seoul tomorrow.

Sunday, July 22, 2007

Korean Fertility

The above table comes from:

Theoretical Explanations of Rapid Fertility Decline in Korea
Doo-Sub Kim

Thursday, July 19, 2007

Won on a win-win Roll?

Bloomberg this morning:

Won Climbs to Highest This Year; Ringgit Gains

By Jake Lee

July 19 (Bloomberg) -- The South Korean won rose to the strongest this year on signs growth in Asia is accelerating.

The currency has strengthened almost 1 percent in July as the central bank and government raised this year's growth forecasts. Vice Finance Minister Kim Seok Dong said today the government will stabilize the won when necessary. China's economy, South Korea's biggest export market, grew at the fastest pace in 12 years in the second quarter, a report today showed.

``It's a fairly optimistic growth picture in Korea, though gains in the won are going to be measured,'' said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. ``The authorities are careful of won strength.''

The won gained as much as 0.2 percent to 914.70 and closed 0.01 percent stronger at 916.00 as of 3 p.m., according to Seoul Money Brokerage Services Ltd. It was last higher on Dec. 8.

Exports to China jumped 28.7 percent in the first 20 days of last month, a report showed July 2. Overall, goods sent overseas, which account for 40 percent of Korea's economy, rose 15.9 percent in June, beating the 12 percent median estimate in a Bloomberg News survey of 11 economists.

Malaysia's ringgit rose by the most in more than two weeks on speculation the central bank will announce measures to boost the foreign-exchange market. The bank said it was not aware of such plans.

Retail Sales June

From the Korean Herald:

Department store sales up 4.4% in June

Korea's department store sales increased at the fastest pace in four months in June, adding to signs growth in Asia's third-largest economy may accelerate.

Sales at the nation's three biggest department store chains, including Lotte Shopping Co., climbed 4.4 percent from a year earlier, after falling 0.1 percent in May, the Commerce Ministry said yesterday. Sales at discount stores rose 1.9 percent in June, compared with a 3.1 percent decline in May.

Korea's central bank last week raised its forecast for the economy's expansion, citing sustained export demand and a revival in household spending. Consumers become the most confident in 15 months, exports soared to a record and the jobless rate dropped in June, according to recent reports.

"Consumer spending is likely to rise steadily," said Go You-sun, an economist at Daewoo Securities Co. in Seoul. "The increase in the stock market is a positive factor to boost spending and I expect consumption to rise further as we go into the second half of this year."

Korea's won climbed 0.02 percent to 918 against the U.S. dollar, close to a seven-month high. The KOSPI stock index fell 0.4 percent to 1942.33 at 9:17 a.m. in Seoul, after reaching a record high on July 16. The index is the world's best performer this month.

Sales at Seoul-based retailer Shinsegae Co. climbed 2.6 percent in the second quarter from a year earlier.

"Department stores saw a rise in sales of clothes and sports merchandise as people bought more goods needed for their summer vacation," the Commerce Ministry said in a statement.

The Bank of Korea boosted its forecast for economic growth in 2007 to 4.5 percent from 4.4 percent. Bank Governor Lee Seong-tae raised the benchmark interest rate to a six-year high on 4.75 percent, the first increase in a year.

Consumer demand "is continuing to improve," Lee told reporters last week in Seoul. Higher interest rates "won't be a hurdle to the economic recovery."

Helping bolster consumer spending, the jobless rate fell to 3.3 percent in June as finance and transport companies hired workers amid rising demand.

Korea's economy has expanded for 16 straight quarters, the longest stretch of growth in more than a decade, largely fueled by increased exports. Job gains and improving confidence will help stoke consumer spending.

Rice Stockpile Goes Up

From The Korean Herald Yesterday:

Government to buy 430,000 tons of rice

The government will purchase 430,000 metric tons of rice this year to add to the nation's emergency reserve, the government said yesterday.

The decision was taken during a cabinet meeting yesterday, as officials decided to buy 14 percent less for the emergency stockpile for 2007 compared to the 504,000 tons bought last year.

Farmers will be paid 48,450 won per 40 kilograms of unhusked rice, the same as last year's rate, ahead of the account settlement period in January 2008, the government said. Of the total, 317,000 tons will be bought packaged in sacks, while the remaining 115,000 tons will be purchased without being packaged. Farmers will receive 670 won less, or 47,780 won, for the unpackaged rice.

The government switched to the emergency stockpile system in 2005 from the system of buying fall crops. Purchase prices for the rice reserve are based on the average price of homegrown rice during the harvest season between October and December.

The government's emergency reserve for the staple grain is a way of protecting the local rice market. Local farmers have been suffering from a declining trend of rice consumption as market opening brings in more diversity of choices.

Rice production is also threatened by a decline in available arable land for cultivation.

Tuesday, July 17, 2007

Bank Of Korea Rate Rise

From the Financial times:

Inflation fears prompt rate rise in South Korea

By Song Jung-a in Seoul

Published: July 13 2007 03:00 | Last updated: July 13 2007 03:00

The Bank of Korea raised its benchmark interest rate yesterday by a quarter percentage point to a six-year high of 4.75 per cent as inflationary pressure builds on abundant liquidity in Asia's third largest economy.

The move - the first increase since August last year - underlines the central bank's belief that the economy is on track for a solid recovery, driven by improving domestic demand and robust exports.

In a statement accompanying the move the central bank said it saw "abundant liquidity in the financial market" and that the increased rate "would still be supportive of ongoing economic recovery".

The rate increase was widely expected after the central bank and the government this week raised growth forecasts for this year to 4.5 per cent and 4.6 per cent respectively.

The central bank predicted economic growth would gather pace in the second half and next year. Moody's Investors Service, the international credit ratings agency, said it might upgrade the country's credit rating after recent economic indicators showed surging exports and rising consumer confidence.

Exports jumped 15.9 per cent year-on-year to $32.4bn (€23.6bn, £16bn) last month, despite the won's continued appreciation against the dollar. Industrial output rose 6.6 per cent in May from a year earlier, and there were increasing signs that a long-running consumer slump might be coming to an end after demand grew by 5.1 per cent in the first quarter from a year earlier.

The Bank of Korea said inflation remained stable at 2.5 per cent, but upward pressure might grow in the second half on prices for oil and other raw materials.

"It was a right move timing-wise to increase economic stability," said Lee Sang-jae, economist at Hyundai Securities. "The rate increase is not likely to be a critical burden to the economy."

But some economists warned that higher interest rates might choke off a fragile economic recovery. They expected the central bank to refrain from tightening monetary policy further.

The won has gained 1.2 per cent against the dollar and 3.3 per cent against the Japanese yen so far this year, hurting South Korea's export competitiveness.

Medical Students on the Increase

From the Financial Times:

Increase in medical students bodes ill for South Korea

By Anna Fifield in Seoul

Published: July 17 2007 03:00 | Last updated: July 17 2007 03:00

When a mathematics student at Busan National University, one of South Korea's top colleges, decided to change course, he had two options.

Nam Kyung-min could either switch to engineering at Seoul National, the country's most respected university, or he could enrol at the medical college of a far lesser university. He chose to do medicine.

"I thought that being a doctor would guarantee me a more stable future," says Mr Nam, now 25 and in his fourth year.

He took the entrance exam at SNU and scored well, but chose Koshin University instead.

"Even though it's not a prestigious school, I was happy just to get into medical school at all."

Decisions such as Mr Nam's are becoming more common in Korea, a country whose astonishingly fast industrialisation in the 1960s and 1970s was built on science and engineering.

Park Chung-hee, the president during those decades, promoted economic development through chemical and heavy industries, while embarking on massive public works projects such as the Seoul-Busan highway, which runs the length of the country.

This strategy helped transform Korea from agrarian basketcase to technological powerhouse. In just one generation there was a 100-fold increase in per capita income - from $100 a head in 1963 to $10,000 in 1996.

But the 1997 Asian financial crisis, which led companies to shed researchers and engineers to improve their balance sheets, caused many Koreans to view medicine as a more stable and prestigious scientific career.

As a result, admissions to science and engineering schools have plummeted in the past decade. The Korean Educational Department Institute says the number students starting science or engineering courses has fallen 27 per cent in the last seven years; only 207,612 registered last year.

More than half the students studying life sciences at SNU are waiting to get on to medical or dental courses.

Competition to get into medical schools is so great that entrance requirements for the college of medicine at Wonkwang University, a small-town academy in the southern provinces (and for Koshin University, where Mr Nam chose to go) are higher than at the once-prestigious college of engineering at SNU.

Education surveys regularly cite "difficulty getting a job" and "poor social treatment" as the main reasons students decide against engineering and science.

The ministry of science and technology estimates that Korea will be short of 4,500 doctors of science and engineering by 2014. This lack of people with doctorates is creating a serious problem for Korea. The country still relies heavily on these traditional specialities and China is snapping at its manufacturing heels.

Kim Doh-yeon, dean of the engineering college at SNU, says he is concerned about the future competitiveness of Korean industry.

Although Korea is "quite competitive" in some industry sectors such as automobiles, semi-- conductors and ship-building, he says: "I have no doubt that such competitiveness is provided by the engineers."

Korean blue-collar workers are no longer competitive in terms of salary, Prof Kim says. "But the quality of engineers is much better than that of other countries and they are very hard workers - 12-hour days are still the norm for Korean engineers.

"Without good engineers, Korea may not survive in the 21st globalised century."

Companies are concerned about China's ability to produce everything from consumer electronics to cars and ships. Samsung Electronics and Hyundai Motor have voiced fears that they will not be able to compete with their low-cost but increasingly high-tech neighbour.

Kim Joon-kyung, vice-president of the Korea Development Institute, an influential think-tank, is worried about the future of Asia's third-largest economy.

"China is making a lot of efforts to upgrade their science and engineering human capital, while Korea is stagnating and failing to move towards the world technology frontier," Mr Kim says.

China is expected to overtake the US as the world's leading producer of science and engineering doctorates by 2010.

To try to counter with the decline, the Korean government has been offering more scholarships in those fields and has exempted many science and engineering postgraduate students from military service.

Prof Kim of SNU is cautiously optimistic that such initiatives can turn the tide. "I think we have hit the bottom and it will get slightly better now. However, the quality of students is still far below what it used to be 10 years ago."

S Koreans cash in on rising won

From the financial times:

S Koreans cash in on rising won

By Anna Fifield
Published: 11/7/2007 | Last Updated: 11/7/2007 01:21 London Time

Lee Gui-nam and her housewife friends will soon join the hordes of South Koreans setting off abroad this ­summer, heading for a tour of eastern China's picturesque Yellow Mountain and West Lake.

"People say it is a famous scenic spot and the price is reasonable – Won700,000 ($755, €550, £380) for a four-day, three-night package tour," says Mrs Lee, who works at an insurance company and contributes to a travel savings account with her friends.

"We save up our money to travel abroad – we have been to the Philippines twice. But this is the first time I have been to China. It is getting more popular and easier for us to go overseas these days."

Mrs Lee is one of the millions of Koreans who will venture abroad in the next few months, taking with them piles of Korean won that make comparatively cheap destinations such as China and Vietnam even cheaper.

While the strengthening currency has been hurting exporters such as Samsung Electronics and Hyundai Motor, it has been a boon to South Korean holiday­makers.

But the combination of declining profits from exports and increasing holidays abroad has created another potential headache for financial authorities – and a surprising economic occurrence. In this manufacturing-led economy, the travel deficit in the current account is now regularly exceeding the goods surplus.

"We think of Korea as an export powerhouse, making computer chips and phones, but whatever Koreans take in from exports they spend by going to the beach," says Frederic Neumann, who tracks the Korean economy for HSBC.

Tourist departures from South Korea have grown by almost 30 per cent over the past three years, hitting 11.6m trips in 2006 out of a population of 48m. China is the preferred destination, attracting 3.9m Korean tourists in 2006, followed by Japan with 2.1m and Thailand with 1.1m.

"In the past everyone wanted to go to south-east Asia, especially Phuket, but these days they are keen to do China and not just Beijing. They want to go to unheard of places too," says Kim Sung-hee, a travel agent for Mode Tour, one of the leading agencies.

When they go, they spend. Overseas expenditure by Korean tourists has grown at an annual pace of about 20 per cent in recent months, to total $1.2bn in April alone. Much of this has been due to spending on credit cards. Koreans charged more than $4.8bn (€3.5bn, £2.4bn) to their credit cards in foreign countries last year, an increase of 32 per cent from 2005.

This outward surge coincides with the steady appreciation of the won against the US dollar, gaining 14.5 per cent in 2004 and 9 per cent last year. It has continued to strengthen this year – this week hitting Won918 to the dollar, a seven-month high.

The finance ministry is uneasy about the continuing rise and its impact on industry. In a recent statement the ministry declared that the won's movement "seems to be out of line with the country's macroeconomic conditions". It added that the currency would be closely monitored.

South Korea's current account swung back into the black in May, recording a $925m surplus after a $2.1bn deficit in April, according to Bank of Korea data, and economists expect it to be neutral by the end of the year.

However, the scars of the Asian financial crisis 10 years ago have instilled a strong streak of financial prudence in the Seoul authorities, who continue to favour healthy surpluses and large foreign exchange reserves.

"The current account remains roughly in balance, but the Korean authorities have been very concerned about the external payments system and still feel the need to run a current account surplus, even though the trade balance has been positive for some time," Mr Neumann says.

"They will have to run a much larger trade surplus in the future to maintain a current account surplus. But it's difficult to see how Korean exporters could ramp up production enough to counteract this."

This dilemma is likely only to worsen. Many financial analysts expect the ­currency to hit Won900 to the dollar by the end of the year and South Korea is likely at some time in the near future to be added to the list of countries whose citizens do not require visas for short stays in the US.

Once that happens, Koreans will have even more incentive to travel abroad and the current account will come under even greater strain.

Bank of Korea to Raise?

In bloomberg yesterday:

Bank of Korea May Raise Rates Again to Fight Asset-Price Bubble

July 16 (Bloomberg) -- Bank of Korea Governor Lee Seong Tae may increase interest rates for a second time this year to prevent money-supply growth from fueling bubbles in the stock and property markets, according to a survey of economists.

Lee and his board colleagues raised the overnight call rate to a six-year high of 4.75 percent last week, taking aim at record lending to small companies that threatens to spur inflation. Ten of 11 economists say the bank will increase the rate to 5 percent by December. One sees no change.

``The central bank's concern is that too much liquidity will lead to a bubble in asset prices,'' said Terence Lim, head of research at Goldman Sachs Group Inc. in Seoul. ``Once a bubble bursts, it will deal a huge blow to consumers and can tip the economy into a tailspin.''

Lee and Finance Minister Kwon Okyu say soaring lending reduces the financial health of banks and consumers, and may undermine the nation's longest economic expansion in a decade. South Korea has suffered the fallout from the end of a boom before. In 2004, a credit-card-fueled debt bubble burst as borrowers defaulted in record numbers, crimping economic growth.

The Kospi stock index rose 0.4 percent to a record 1970.85 at 9:36 a.m. in Seoul, taking this year's gain to 37 percent. The won traded at 917 per dollar, close to a seven-month high. The five- year government bond yield fell 2 basis points to 5.49 percent, after rising to the highest since December 2005.

Loans to small businesses soared to a record last quarter as lenders sought new corporate customers to overcome tighter rules for mortgages. Governor Lee says finance companies have a ``herd mentality'' that's fueling the supply of money and poses an inflation risk.

`Speculative Investments'

``The suspicion is that some small companies are diverting their borrowed funds into speculative investments in the property and stock markets,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul.

Lending to small and mid-sized companies jumped 8.34 trillion won ($9.1 billion) in June from May, the largest gain since the central bank began compiling figures in December 2000.

``Loans to small and mid-sized companies are increasing sharply, while growth in household debt has slowed,'' Lee said in a speech to employees on July 13. ``Stock prices are gaining at a fast pace amid abundant liquidity.''

South Korean finance companies, such as Kookmin Bank and Woori Bank, have lent more and increased profits since recovering from the fallout of the 1997-98 Asian financial crisis that left them saddled with debt and pushed the economy to the brink of a national default.

South Korea sought a $57 billion bailout from the International Monetary Fund in December 1997, pledging to overhaul its financial system in return.

Asian Region

Now authorities are worried the pickup in borrowing once again raises the specter of loan defaults and may undermine 16 consecutive quarters of economic expansion.

South Korea is not alone in tackling the threat of asset bubbles. Capital inflows have inflated property and stock prices across the region, according to Singapore Prime Minister Lee Hsien Loong and other officials who attended the World Economic Forum last month, 10 years after Asia's financial crisis.

China's benchmark stock index has soared 98 percent this year as the country struggles to mop up the inflow of cash from record trade surpluses. Hong Kong apartment rents are the world's costliest.

South Korea's central bank and government last week both raised their forecasts for economic growth in 2007. Moody's Investors Service says it may upgrade the nation's credit rating, and reports in recent weeks showed exports surged to a record in June and consumers became the most confident in 15 months.

`Ultimate Concern'

``Not only liquidity but also economic fundamentals are supporting asset prices,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``The Bank of Korea's ultimate concern is economic stability, in terms of prices and financial-system stability.''

Still, higher interest rates may choke off a recovery in the economy and also fuel gains in the currency that could curb export growth, according to economist Frederic Neumann.

``There are so far few signs that increased lending is stoking asset-price inflation,'' said Neumann, of HSBC Markets Ltd. in Hong Kong. ``Economic growth still remains below potential and significant risks in the form of high household debt remain.''

The won has surged to a decade-high against Japan's yen, making South Korean exports relatively less competitive than products made in Japan. Overseas shipments make up 40 percent of the economy and have been a key driver of growth.

EU South-Korea Free Trade Deal?

From the Budapest Business Journal:

EU talks with South Korea on free trade deal

17 Jul 2007
The European Union kicked off the second-round talks with South Korea on a free trade deal, offering totally free market access for South Korean exports on condition of reciprocity.

“The EU has never before taken such an ambitious position in a bilateral free trade negotiation,” the 27-nation bloc said in a statement. The EU set the bar high by offering 100% tariff-free market access for South Korean exporters to the EU market if South Korea makes a similarly ambitious offer. In return the EU is looking for substantial new access to the growing South Korean market in key areas like automobiles, manufactured goods and business services. The 27-nation bloc also eyes investment opportunities in South Korea, seeking removal of restrictions on EU investors.

The EU took investment as a crucial area for Europe, where no disciplines currently exist under the regime of the WTO. The EU is the biggest investor in South Korea with a total investment of $5 billion (€3.6 billion) last year, accounting for 45% of foreign direct investment inflows to the East Asian country. Besides tariff, the EU wanted to put a new focus on non-tariff barriers and behind the border issues in South Korea, such as regulations that are unnecessarily complicated and burdensome and which may in some cases present greater obstacles than tariffs.

The EU launched the negotiation with South Korea in May, which is part of the bloc's bilateral efforts to boost its presence in growing emerging markets. Those bilateral negotiations are meant to complement the multilateral WTO system by pushing liberalization in key areas like investment not currently covered by WTO rules, the EU said. The second-round talks are expected to last five days, with a third round due in September. Studies showed that an ambitious free trade agreement between the EU and South Korea could increase bilateral trade by between 30 and 40%.

Automobile exports are emerging as a bone of contention as the European Union and South Korea engage in their second round of free trade talks in Brussels, local analysts said on Tuesday. “The broadest gap (in the trade talks) comes from cars,” said South Korea's chief negotiator Kim Han-Soo. South Korea has offered to phase out an 8% duty on cars from Europe over seven years. “The gap is so distinct that we must bring this car issue back home for further discussion with the concerned parties at home.” However, the chief negotiator hinted South Korea may react favorably to European requests.

Cars account for the lion's share of South Korea's trade surplus with the EU. The surplus reached $18 billion in 2006. South Korean shipments of cars to Europe jumped from 677,469 units, worth $6.81 billion, during 2004 to 741,740 cars, worth $9.16 billion, during 2006, or 3.8% of the European car market share, according to the Korea Automotive Research Institute (KARI) in its report. Meanwhile, the number of European cars sold in South Korea increased from 10,182 units, worth $637 million, in 2002 to 23,769 cars, worth $1.62 billion, in 2006. Duty-free access of South Korean cars to the European market could boost South Korean car exports by up to 124,000 units, worth $1.4 billion a year, the South Korea's business interest group Federation of Korean Industries (FKI) forecast.

The EU puts a 10% duty on imported cars versus a 2.5% duty imposed by the US, versus an 8% duty imposed by South Korea. KARI expects European carmakers to gain more than South Korean carmakers from a free trade deal. “If the EU-SK free trade becomes effective, the impact on the South Korean carmakers will be limited. South Korean carmakers like Hyundai Motor are ready to ramp up local car production to reach up to 600,000 cars a year in Europe,” KARI's report said.

Meanwhile, the EU wants greater access to South Korea for its main export products like whiskey, wine, port, chicken and cheese, while South Korea wants easier access to European markets for its color TV sets, textiles, shoes or video equipment. The trade volume between the EU and South Korea reached €60 billion ($82 billion) in 2006. The EU is South Korea's second largest export destination after China. South Korean exports to the EU include automobiles, consumer electronics, semi-conductors and ships. Important EU exports to South Korea include machinery, chemicals and transport equipment. The EU also exports more than €1 billion in agricultural products like pork and wines to South Korea every year. (,