A lot has happened in the economic world in Korea. In the past few days quite a bit of economic data has been released and that has spurred the central Bank of Korea (”BOK”) to take some matters (particularly relating to inflation and the strength of the currency) into its own hands.
Some of the bad news:
- Korea’s inflation hits a 10 year high. Consumer prices jumped 5.9% from a year earlier. Korea’s rate of inflation is 6th highest in OECD.
- The BOK today has just raised its benchmark interest rate by 25 basis points from 5.0% to 5.25%.
- The BOK continues to prop up the won and has burned $10.6 billion in foreign currency reserves in July. Current reserves stand at US$247.5 billion, down from $258.1 billion in June. FX reserves fell $14.7 billion, or 5.6%, during the first seven months of this year.
- Domestic demand is shrinking and job growth remains slow.
- One of Korea’s largest export markets, shipbuilding, is showing strain.
Some of the good news:
- Korea posted a current-account surplus for the first time in seven months in June because exports increased. The surplus was $1.82 billion last month, compared with a deficit of $377.5 million in May.
- Export sales jumped to a four year high and still remain very strong, somewhat offsetting the decline in domestic consumption.
- Oil and other commodity prices appear to be declining. Oil closed at $119 a barrel, off from its high at almost $136. Well, that’s good news for everybody, not just Korea.
Overall, more bad news than good news. However, the bad news doesn’t point to terrible times, but does point to a slowing economy.
39 Comments
It’s a tough spot to be in for the BOK. Raising interest rates is a more effective way to strengthen the currency and dampen inflation than selling USD reserves, but they’ve been avoiding it because they don’t want higher interest rates to dampen domestic growth.
So, a policy that helps the exporters, the traditional strength of the Korean economy - which means weak won/low interest rates and high inflation; or a policy that strengthens the won (raising interest rates), which has effects that are hard to predict: stronger won makes imports cheaper and so should reign in inflation and may boost domestic spending overall, but then again, higher interest rates are usually a tool dampen domestic spending. Which would it be? And a stronger won will definitely NOT help the chaebol exporters, but isn’t Korea supposed to be getting past that era of development, and trying to build up a domestic economy with enough consumption to ride out foreign recessions?
If the chaebol were calling all the shots, the BOK wouldn’t have raised at all. Still, 5.5% - 5.9% = -0.4%, and real interest rates are negative. They could go up a lot more.
What we’re seeing is nothing more than vacillation, indecisiveness. Too bad the President’s been hobbled by mob rule. A bit of leadership, some sort of strategy, would be a good thing.
WangKon, did you see that tiny little announcement about Kumho Tire and some entity called ‘Beacon’?
http://www.bloomberg.com/apps/.....veyyrRehKc
I bet they just sold a put option to Beacon to buy back the shares in a few years at the same high price they were stuck with last week.
Just for kicks, regarding that link in #1 above, here is the article in full. The JoongAng also reprinted the same article here,
http://joongangdaily.joins.com.....id=2893294
but they left off the last line, which I put in bold. (JoongAng is owned by Samsung - didn’t some Samsung daughter marry into the KumhoAsiana family?)
Aug. 5 (Bloomberg) — Kumho Tire Co. said that Beacon, a Cayman Islands-based investment company, bought a 108.8 billion won ($107 million) stake, ending concerns that the Korean tiremaker may have to buy back stock at almost double the current price.
Beacon purchased 7.5 million shares at 14,501 won apiece, Kumho Tire said in a filing to the Financial Supervisory Service today. Kumho Tire parent, Kumho Asiana Group, doesn’t control Beacon, Kim Young Sik, a Kumho Asiana spokesman said. He declined to give details on who owns the investment company.
The deal means that Kumho Tire, South Korea’s second- biggest tiremaker, won’t have to buy back the shares, previously held by Cooper Tire & Rubber Co. Cooper Tire had said that it would exercise a so-called “put option” that would have enabled it to sell the shares at $14.26 (14,506 won) apiece.
The shares, representing an 11 percent stake, will make Beacon Kumho Tire’s second-biggest shareholder behind Korea Kumho Petrochemical Co., according to data compiled by Bloomberg.
Beacon decided to invest in Kumho for its growth potential, said Kumho Asiana’s Kim.
The tiremaker rose 3.3 percent 7,440 won at the close of trading in Seoul, compared with the benchmark Kospi index’s 0.5 percent fall. The company has lost 47 percent this year.
Linkd — If you’re saying it’s interesting that a Cayman Islands-based shell company we’ve not previously heard of as investing in Korea would find Kumho Tire so compelling that it would pay nearly double the current market price for an 11 percent stake in the company, I agree.
Indeed. Not just that, though. The shares were held by Cooper - why didn’t Cooper shop its stake around the Caribbean itself? Because Cooper just wanted a straight sale, of course. I have to assume there’s a deal in there (in some form of derivative), whereby Kumho has insulated Beacon from loss. There’s a zillion ways to create such an instrument , but the effect is simply to stall the (potential) payout for a while longer.
Good article you wrote on the local housing market, btw.
Linkd,
I find myself agreeing with you once again.
At this point, it makes better sense to use interest rates to lower inflation. Korea can’t use much won intervention to do this. Check out this article.
Korea’s currency reserves as of the end of July stand at $247.5 billion. Their short term debt stands at $176.5 billion. As you know, short term debt is debt that has to be paid in a year or less. It was a run at short term debt in 1997 that cause Korea to fall into an economic crisis and request an IMF bailout. Korea’s FX reserves, net of short term debt, is only $71 billion. Thus, Korea’s dry powder today to manipulate the won is pretty the aforementioned net number. However, it’s likely that Korea’s short term debt will continue to increase relative to Korea’s real FX reserves, net of short term debt, thus it will make their dry power much less than $71 billion. If it goes below $50 billion, I expect S&P to lower Korea’s credit rating to below A, which will making capital markets in Korea even tighter…
Oh, and I don’t know what the hell is going on with Kumho Tires. That’s too granular for me.
Those two charts at the top kinda say it all, don’t they? So…buy dollars now at 1,015, ya figger? Are they going to get any cheaper for us?
Depends on commodity prices. Lower commodity prices gives the BOK confidence to sell more dollars for won. Why? Lower commodity prices will help keep inflation under control.
I think the BOK believes that commodity prices will decline. However, it’s not declining fast enough for it to make the kind of difference the BOK desires.
If gas hits 90 to 85 bucks… the won will be 1040 or more again.
So… take the chance? Eh… to each his own.
For the rest of this year, I think gas won’t be less expensive than $100/barrel. So the won won’t get any cheaper than 1025-1030… but we’ll see.
If I knew more… I’d be richer than Soros, but since I’m not… I don’t know any more…
How much of Korea’s reduced consumption is because of rising fuel prices? Here in the U.S. many people have just stopped buying a lot of things to cover the $100s more they have to pay for gas.
# 9,
In the 90’s and early 2000’s gas consisted of 4 to 4.5% of U.S. household income. Now it’s 11%.
http://blogs.wsj.com/economics.....an-update/
U-81, rising fuel costs affect more than household spending. Oil effects industrial transportation prices, corporate energy prices, material prices (all plastic is made out of petrochem), fertilizer (all modern fertilizers are petrochem based) costs, etc.
#10, I know about all that. But what I want to know is if people in Korea are making conscious decisions to buy less of their routine items to offset the rising cost of gas, like in the U.S., or if they are just riding it out without changing much of their routine spending.
For example, Starbucks has introduced Pike Place Roast, which is $1.65 coffee, because a lot of people are cutting back on their $4/cup gourmet coffee to make up for rising gas prices and Starbucks wanted to make sure they keep up their daily Starbucks routine. Starbucks is also selling all their coffees for $2/cup in the afternoon if you bring a receipt to show you bought a regular priced one earlier in the day, so they can keep people in their twice-a-day habit.
BTW, I’m a professional viral marketer for Starbucks, in the interest of full disclosure. But even if I weren’t, Starbucks is really good coffee and it’s the part of the day I look forward to most. Why don’t you head for the nearest Starbucks yourself and relax to the fine aroma of a Kenya blend.
Let’s not forget that 70% of foreign investors are looking to get out of the land of the morning xeophobia.
I wonder why that hasn’t been said. It appears that Breen may have been correct after all, despite what some have said about him here.
JohnT where is the 70% figure from?
Well, I will not because after that fine roasted coffee comes off the boat and gets to Seoul, it’s already too old to drink since fresh roast lasts for only about 5-7 days. I will take local fresh roast.
Why doesn’t Starbucks build a roasting facility here in Asia and isn’t Starbucks diluting its brand in the Korean market by allowing so many franchises?
70% of this foreign investor is looking to get out of Korea. But I’m from Alberta - boom times over there, baby.
user-81, I don’t think the stats you’re looking for are available yet. All we know for sure here is that prices are going UP. There is certainly no news of strategic discounting to maintain consumer habits. Your story reminds of the bleak winter of 97/98, when the ajummas hung out signs saying “IMF 김밥”, which sold for 500 won. Lots of stores had IMF specials.
If the Koreans are in pain, eventually we’ll see stories reporting drops in overseas travel, overseas education, and apartment flipping. They LOVE to report on that stuff. But the ‘basket of goods’ at the household level - I don’t see much of that reported.
user-81:
Is the $2 afternoon special in effect at Korean Starbucks shops?
I don’t want stats as much as the general feeling on the ground, so anecdotes would be fine.
Also, I wouldn’t have equated Pike Place Roast with IMF 김밥, but I guess it’s a good match. The cost of Texas tea can cut into consumption of chai tea.
The feeling on the ground is brought to you by chiamatt. As it was in the beginning, is now, and ever shall be:
http://www.rjkoehler.com/2008/.....ent-155866
Cloying_Odor, I don’t think so. I’m not in Korea so I’m not sure. If they don’t have Pike Place Roast, they probably aren’t going to do this either. And for now it’s only until the beginning of September, but they could expand it.
And I just realized I made a mistake with the $2 coffee. It’s for iced drinks, not hot drinks. But who wants a hot drink in weather like this?
http://www.reuters.com/article.....7520080806
@18
“The hole” should have a quotes hall of fame, and that one should be added first.
And then there’s the immortal:
http://www.rjkoehler.com/2007/.....ent-115907
Here is some good indepth research on the Korean market. Scroll down to open PDF file.
http://macq.wir.jp/e.ut?e=9L3M.....DvmPvKrbnS
I did so yesterday in Kuwait. A venti drip + 2 shots is almost $6. Today I buy a grinder. I’ll be at less than $0.50 a cup.
Cut out individual bottled water, coffee shops and booze (not by choice) and save a bundle.
Starbucks Korea (plus all the clones) have no reason to cut prices. In my city (Ulsan) three new Starbucks have opened this past year. The Starbucks bug is just reaching outside of Seoul, and everybody is lining up for their 6000 won fruit shakes (which you can buy from the ajumma outside for 1500). Starbucks Korea is a Luxury Brand ™ and if it’s luxury in Korea, people are more than happy to pay for it
http://www.sweetmarias.com
They ship to APO. Beans, Roasters, Grinders…. better than starbucks is easy to achieve for much less per cup. And you can learn about real coffee… not that pretentious corporate crap they feed you …. ain’t no such thing as “the starbucks roast”.
OK, then: I drive in Seoul - a lot, generally along the same 2-3 routes everyday at the same times. There has been a very significant drop-off in traffic, including especially in the morning and evening rush hours, even on Mondays and Fridays (when, if you know Seoul, you’ll know it’s usually exceptionally heavy.
I also like to check out the “deals” at the upscale second-hand auto pawnshops lots, and there’s suddenly been a in upsurge in the availability of the usual pimpmobiles.
The forecast calls for pain.
WOW, Brendon Carr gets quoted by Yonhap which gets published by Yahoo Asia News.
“Still, critics say Hyundai’s success in the U.S. market comes at the expense of South Korean consumers, who are being forced to pay higher prices than their American counterparts.
Hyundai was generating a profit margin of some 10 per cent on the Korean-built cars, compared with just two per cent for the same vehicles built in the U.S., according to industry analysts.
“With those kinds of margins to extort from Hyundai, it’s no wonder the Hyundai Motor labor union desperately opposes open markets and the Korea-US Free Trade Agreement,” said Brendon Carr, an American lawyer who has been working as a foreign legal consultant in Seoul for over 10 years, on his blog.”
http://asia.news.yahoo.com/080807/4/3nao3.html
It’s been a known fact that Korean automakers have been engaging in dumping (double-pricing). I myself heard stories of Korean expats coming to the U.S. buying Korean cars there and shipping them back to Korea when they go home, b/c it’s cheaper that way.
I was wondering why the U.S. wasn’t doing anything about it.
“Cut out individual bottled water, coffee shops and booze (not by choice) and save a bundle.”
Get your booze at the market and host more house parties. Do as the Japanese do… have the guests pay a cover!
@Squatch re #28:
“It’s been a known fact that Korean automakers have been engaging in dumping (double-pricing).”
I thought dumping was pricing something below its cost of production. If Hyundai is still making a 2 percent profit margin on vehicles sold in the U.S. then that wouldn’t be dumping.
Japan’s economy could be headed into a recession. It’s likely that Japan’s GDP contracted by 2.3% in Q2 2008. Interesting since Japan’s GDP grew 3.3% in Q1 2008.
Links:
http://www.bloomberg.com/apps/.....refer=home
http://japanjapan.blogspot.com.....-2008.html
It’s not dumping. It’s gouging the Korean consumer. Keep ‘em ignorant, and manipulate their brains with drivel about how the Korean market is somehow “special” enough to justify the higher prices we have to pay here, and let nationalism immunize them against the idea of looking to foreign products.
Think about it: Hyundai’s Genesis is 40% more expensive in Korea than in the United States. Yet it’s made here, then put on a ship to cross 5200 nautical miles to the Port of Long Beach where it somehow magically loses “value”. How can that be justified?
Some of the higher margin goes to pad the payrolls of low-productivity chaebol and other enterprises, some of it funds corrupt and abusive labor unions and their perfidious leaders, some of it goes to underwrite personal consumption for the “owner” families, and some of it goes to build slush funds to bribe politicians to keep Korea’s markets rigged against competition.
But all of it is paid for out of the inexcusably higher prices gouged out of the struggling Hong Kil-Dong who wasn’t victorious in the SKY entry tournament and thus earns W880,000 a month while being manipulated into opposing the improvement in his own standard of living which would come from open markets.
They keep it all going by the magic words “Dokdo”, “Eat and Run Foreign Investor” and “Mad Cow”. What a system!
The price difference of only 2% can not be unjustified. What if the won goes down 2% againt the dollar? Noboy complains and it happens on a daily basis.
user-81:
“Dumping” includes pricing below the home market charge, so it’s still “dumping”:
http://economics.about.com/lib.....umping.htm
Technicality aside, it is “gouging”.
WangKong:
Japan’s Q1 growth was unexpected and was noted in the WSJ and other financial press, as far as I can remember. It was unexpected because the U.S. economic slowdown was supposed to slow down Japan, too. Looks like exports to China more than compensated for the American slowdown. At the time, Japan’s Q2 slowdown was also foreseen, because by then, U.S. slowdown was expected to affect China, too.
I meant “Wangkon”.
#34:
Moreover, the steel skins of the US models generally are heavier gauge, so the component cost of the ROK versions is less to boot.
Ouch…
Won’s taking a swan dive.
http://in.reuters.com/article/.....5920080808
What’s going on?
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