When President Roh Moo-hyun took office in February 2003, few expected he would have an easy tenure given his peculiar political background as a former human rights lawyer. Unlike previous South Korean presidents, he swept to victory on the back of young voters wishing for drastic reforms. Fewer people, however, foresaw that he would get impeached by the opposition-led National Assembly on March 12 this year, plunging the country into a dizzying confusion.
The formal charge was that he violated the Election Law by publicly supporting the pro-government Uri Party ahead of the crucial general elections on April 15 this year, which were won convincingly by the Uri Party. In South Korea, the law forbids civil servants, including the president, from electioneering.
Regardless of whether the charge can be justified, observers were bewildered at scenes of chaos in the National Assembly chamber, with Uri Party members hurling furniture at the speaker’s podium in protest against the bill of impeachment which had secured the required two-thirds majority.
While Mr Roh remains powerless until the Constitutional Court makes a ruling on the charges against him within six months of his impeachment, Prime Minister Goh Kun, who is fondly called “Mr Stability”, is taking over as an interim head of state.
Approval rating
The initial reaction was largely calm, the financial markets absorbing the shock rather smoothly. But there remains worries that Mr Roh might lose his grip on the country’s management as a head of state. His approval rating was hovering at around 30% for much of 2003, reflecting the public disappointment, especially concerning corruption scandals that involve his close aides.
But Mr Roh need not feel too miserable. He may pull off a powerful comeback – if the Constitutional Court rejects the impeachment motion and the Uri Party wins a majority.
The Uri Party, which had 47 seats in the 273-seat outgoing National Assembly, and was competing with the main opposition Grand National Party (GNP) with 137 seats and the Millennium Democratic Party with 61 seats, achieved a stunning electoral reversal. At the time The Banker went to press, and with 99% of the election results in, the Uri Party’s projected representation had risen to 152 seats and the GNP had fallen to 121.
Notably, the popularity of the Uri Party soared after the passage of the impeachment motion that angered the public and sparked a series of candlelight vigils on the streets across the nation.
However, the real question is whether the impeachment will leave a lasting – and negative – impact on the Asia’s fourth-largest economy that faces a slew of challenges such as sluggish consumer spending and unstable oil prices caused by terrorist acts and instability in Iraq.
“The damage has been done,’ says political science professor Kim Il-young of Sungkyunkwan University. “Even if the Uri party wins the general elections and the president’s status is restored, uncertainty will prevail for a while.”
Mr Kim notes that the public views the impeachment of Mr Roh as an “outrageous” tactic of the opposition party lawmakers, but does not give a high mark for Mr Roh’s rule over the past year.
“Mr Roh’s drastic style and continued push for reforms may create more enemies than friends, and if he keeps such style, it will be difficult to clear the nation out of the current troubles,” Mr Kim says.
Moody’s Investors Service has also warned that Korea’s economic recovery may be hampered because of political concerns stemming from the parliamentary vote to impeach the president.
“The interim government led by Prime Minister Goh Kun has imparted stability and continuity in the wake of the impeachment of President Roh Moo-hyun,” Moody’s says. “Nevertheless, the new political uncertainties could hinder, at least for the time being, the expected recovery in domestic economic performance.”
Exports holding up
While the concern about Mr Roh’s leadership in the post-impeachment period lingers among local and foreign investors, the Korean government is counting heavily on rising overseas sales to help double economic growth to 6%, from 2003’s lacklustre 3% gain.
The country’s exports indeed remain bullish – at least for now. But analysts are cautious over whether the growth trend will continue. Exports, which account for about 60% of Korea’s GDP, rose 39% to a record $59.79bn in the first quarter from a year before, led by more than a 50% rise in sales to China and by higher sales abroad of electronic goods and autos. Its foreign reserves also rose to an all-time high of $163.6bn.
Industrial production also posted record year-on-year growth in the 42 months leading to February and facility investment was up 2.1% from a year ago, the first increase since June last year. The utilisation rates at factories, mines and utilities reached 83.5%, the highest since 83.9% in October 1987. A utilisation rate of more than 80% indicates that the economy is beginning a recovery.
“After a difficult period last year, the Korean economy is getting back on the right track, and there will be signs of a recovery in employment and private consumption from the second half of this year,” Finance Minister LeeHun-jae said.
Rising overseas sales helped the nation achieve a $3.1bn current account surplus in February, its largest in five years. However, a widening surplus for the current account, which measures the flow of goods, services and money across borders, may cause the Korean won to strengthen, possibly hurting exports by making Korean products more expensive overseas.
“At present, export figures look good largely because Korea’s major trading partners like China and the US are absorbing export goods relatively well, and the Korean government is offering a series of export stimulus policies,” says Lee Min-koo, an analyst at Kyobo Securities.
Mr Lee, however, cautions that the Chinese economy shows signs of overheating, and the US economy is yet to shake off worries about slower-than-expected job creation. “What’s certain is that all eyes are on consumer spending that can replace export drive as a key engine for economic growth here,” Mr Lee says.
To promote private consumption, the government recently lowered the special excise taxes on cars, air conditioners and projection televisions starting in April. The measure is valid until the end of the year.
The trouble is that consumer confidence fell for the second month in a row in March, casting a dark cloud over the outlook that a recovery might come along soon, according to data from the National Statistical Office.
The consumer expectation index, a barometer of consumer confidence for the coming six months, fell to 94.4 in March from 96.3 in February. The figure hit a 16-month high in January at 98, the highest since September 2003. An index below 100 indicates that more consumers are pessimistic than optimistic and therefore intend to spend less.
Credit card overspend
Part of the blame for lacklustre consumer spending is placed on the credit card bubble that began swelling two years ago. At the end of February, 2.5 million people were classified as credit card defaulters – consumers who were at least three months behind on their accounts.
According to the Korea Federation of Banks’ statistics, nearly half of all debt defaulters, numbering 1.9 million, are aged between 20 and 40, Mr Roh’s core supporters.
And the ratio of credit card payments overdue for more than one month jumped to 15.39% of total credit in February, against 15.16% in January. The value of unpaid card bills at eight credit card companies rose to Won9100bn ($7.8bn) in February, from Won8100bn won in January, the Financial Supervisory Service said.
The government plans launch a “bad bank”, a consortium to be set up jointly by the state-run Korea Asset Management Corp and local financial companies, to allow delinquents to replace their debt with fresh loans at an annual interest rate of around 6% for up to eight years. But some debtors seem to be just sitting tight ahead of the new rescue, sparking a dispute about moral hazard.
Department store sales – a yardstick for consumer spending – declined 11% in March compared with the year-earlier period. Discount store sales also declined 0.2%, reflecting the tepid consumer sentiment.
Unsurprisingly, the Bank of Korea (the central bank) decided to keep the benchmark call rate unchanged at 3.75% for April. At a recent news briefing, the central bank governor, Park Seung, said the rate freeze was necessary as there were no clear signs of recovery for consumption and corporate investment. The call rate has remained unchanged since last July.
But Mr Park expressed strong optimism about the economy, saying this year’s growth could reach 6% on the back of robust exports.
“Bolstered by surging exports, the country’s economic growth rate is expected to be between 5.2% and 6% in 2004,” he says. “Korea’s exports are likely to remain strong throughout the year as the growth rate of the global economy is forecast to rise to 4.6% from an earlier estimate of 4.1%.”
Mr Park also estimates that the Korean economy grew at an annual rate of about 5% in the first quarter of this year.
The bank head says Korea’s current account surplus should swell to $15bn this year, far more than the central bank’s original forecast of $6bn. But inflation is expected to slightly exceed the central bank’s containment target of 2.9% this year, due to a jump in international prices of raw materials.
Oil price worries
Despite the upbeat comment by the central bank, Korean exporters remain wary of volatile oil prices, which coupled with the appreciating won, could send the economy down again.
The recent clashes in Iraq have triggered fresh concerns surrounding crude oil prices and industry watchers are growing doubtful that seasonal factors would suffice to lower per barrel prices to the $26-$28 range that experts earlier forecast.
The Korea National Oil Corp, which tracks crude oil prices, has said prices are likely to fluctuate further in connection with political instability in Iraq.
In addition to higher oil prices, the stronger won could pinch exporters that form the underpinnings of the Korean economy. Although major exporters have skirted troubles stemming from the currency fluctuation thanks to the intervention of the Korean central bank, policymakers are worried that pressure on the Korean won might ratchet up.
Business confidence dropped in March for the first time in four months, according to a survey published by the Federation of Korean Industries, a big business lobby. That may make companies less inclined to invest and hire, damping a nascent economic recovery.
To help revive the economy. the government is making all-out efforts to stimulate sluggish domestic demand, amid sceptical reaction from analysts. In March alone, about 16 stimulus measures were unveiled by seven economy-related ministries. Of the 16 measures, six are aimed at job creation, three are to encourage private consumption and the remainder are corporate investment promotions.
Furthermore, the government is frontloading 54% of its budget spending in the first half of this year to encourage an early economic recovery. It earmarked Won57,000bn for the first quarter of the year, of which Won50,000bn was spent on schedule.
Employment levels
But critics point out that job losses in Korea pose one of the biggest threats to the country’s economic recovery. In February this year, the nation’s unemployment rate rose to 3.9% from 3.7% a month before, and the unemployment rate for people aged between 15 and 29 climbed to 9.1% from 8.8%, more than double the overall jobless rate.
Government statistics showed that large firms are unwilling to hire new workers this year because of economic and political uncertainties caused by a weak economic recovery and the impeachment of Mr Roh.
The Finance Ministry proposed to offer companies Won1m in tax deductions for every new full-time hire exceeding their average payroll over the previous two years. If approved by the National Assembly, the measure would take effect from this year until 2006. It is part of the government’s effort to create 300,000 jobs this year. The government plans to expand the payroll in the public sector by 80,000 this year and provide a variety of training programmes.
The question is whether foreign investors hold a positive view of the Korean economy. Vice Commerce Minister Kim Chil-doo has said that foreign direct investment plans, which rose 175% in the first quarter to $3.05bn, offer a positive outlook. The surge was also helped by Citigroup’s plan to spend $1.7bn to buy KorAm Bank.
Yoo Jung-seok, an analyst at Hyundai Securities, says: “Although the government is taking various measures to spur a nascent economic recovery, it has to deal with a slew of obstacles such as high jobless rate, sluggish consumer spending and labour disputes to regain confidence among foreign investors.”
