S. Korea pulls out of tunnel but uncertainties lie ahead

(EDITOR'S NOTE: This is one of five special stories that Yonhap News Agency will run
on Monday focusing on how the South Korean economy has weathered the global economic
crisis since it erupted last year.)
By Koh Byung-joon

SEOUL, Sept. 7 (Yonhap) -- South Korea's economy seemed to be moving into an
endless dark tunnel last September when its financial markets tumbled following
the unexpected collapse of U.S. investment giant Lehman Brothers.
The downturn took a heavy toll on the country's export-driven economy and many
said it would take quite a while to get it back on track. Fears deepened the
nation might confront a crisis similar to the one that buffeted it a decade ago,
while the government repeatedly dismissed those jitters as "groundless" and
"far-fetched."
After less than a year, the mood is changing fast -- at least in terms of
indicators -- and the government's stimulus efforts seem to have helped bolster
the economy. Now experts are cautiously talking about when and how to reel in the
lifelines that were used to stop the free-fall.
"The serious stage of the financial crisis has passed with things having returned
to pre-Lehman crisis levels. Foreign exchange rates, borrowing costs and stock
markets are all stabilizing, though the money flow from the financial sector to
the corporate sector remains insufficient," said Shin Min-young, a senior
economist at the LG Economic Research Institute, a private think tank.
The latest indicators are supporting suggestions that the worst crisis in more
than a decade might be over -- or is at least near the end -- for Asia's
fourth-largest economy.
Industrial output grew for the first time in 10 months in July, while sales of
consumer goods increased for a seventh straight month. South Korea also posted a
current account surplus for the sixth consecutive month in July.
Those data stand in stark contrast to the figures coming out a year ago, when
South Korea's financial system and economy tanked in the midst of the
Lehman-sparked turmoil.
Credit almost dried up for local banks, spawning rumors they might fail to pay
maturing short-term debts and face a repeat of the 1997-98 financial meltdown.
Fitch Ratings, one of the world's leading credit appraisers, was quick to lower
its outlook for South Korea's sovereign rating to "negative."
With the plunge seemingly bottomless, the government and the central bank
scurried to ease the downturn and spur the staggering economy by unveiling
diverse fiscal spending plans and reducing key interest rates to a record low
level.
Those efforts seem to be paying off.
Financial markets have been stabilizing in recent months thanks to the return of
foreign investors, with the nation's benchmark KOSPI stock index surging to a
record high for this year and the local currency gaining substantial ground
against the greenback.
Foreign reserves also surged to a 13-month high in August, easing concerns a
sudden exodus of foreign capital could paralyze the nation's funding system.
Global think tanks have turned favorable toward South Korea's economy, citing its
stepped-up efforts to tide over the crisis, revising up once dismal outlooks for
its economy.
In August, the International Monetary Fund set its growth outlook for Korea to
minus 1.75 percent, revising up its projection of a 3 percent contraction issued
just a month earlier.
According to the nation's central bank, South Korea's economy grew 2.6 percent in
the second quarter of this year. That compares to a mere 0.1 percent advance in
the first quarter and a 5.1 percent plunge during the final quarter of 2008.
Adding to the upbeat mood, Fitch upgraded its outlook for South Korea's credit
rating to "stable" last week, saying the nation's "credit fundamentals have
regained ground" against other peer countries.
All of this may give the impression that things are back on normal, but many
experts caution against declaring that South Korea has emerged from the dark
tunnel, saying significant uncertainty still surrounds the immediate future.
The government now has less fiscal leeway in the months to come to support growth
after unloading over 60 percent of its annual budget during the first half.
The private sector is also reluctant to expand investment and hire workers for
fear of murky business conditions. According to government data, facility
investment plunged 18.2 percent in July from a year earlier, marking minus growth
for a 10th straight month.
Job markets are in a slump, serving as yet another drag on the government's drive
to bolster domestic consumption amid weak exports, which account for around 60
percent of the economy.
"The government has spearheaded stimulus measures but now is the time for the
private sector to come forward," said Kwon Sun-woo, a senior economist at Samsung
Economic Research Institute. "To that end, efforts should be made to spur
corporate investment."
"What businesses hate most is uncertainties. They are not sure yet whether the
crisis has really come to an end... The government has to come up with
business-friendly measures aimed at creating a mood and environment for them to
expand investment," he added.
The government says it will stick to its "expansionary" macroeconomic policy
stance until the private sector is capable of recovering on its own, and that it
will closely monitor market conditions to determine when to withdraw those
measures under its so-called "exit strategy."
On Thursday, the finance ministry announced it will front-load spending in the
second half, using 10 to 12 trillion won more in the third quarter by tapping
funds earmarked for the fourth. It called this is part of its effort to spur
economic recovery "by complementing the lack of private-sector investment."
Increased spending, however, will likely put a drag on the nation's fiscal
soundness. The ministry said that it has pushed back the target for balancing the
budget to 2014 due to recent expanded spending and other stimulus efforts.
kokobj@yna.co.kr
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