1)
Economical Description
Korea has huge success within 15 years and is developing rapidly. Especially current account balance of Korea have been surplus for long times. And this has given advantage to Korea in order to grow up rapidly.
Within 15 years, GDP of Korea has
increased due to foreign direct investment and export. These indicators have
huge share of GDP of Korea. And high inflation was declined significantly.
Wealth of Korean people went up.
Korea has increased their export since
1970. Export/ GDP ratio of Korea was 34% in 1978. The country has saved their
surplus and saving ratio was very high for long years. Ship construction and
textile sectors were main sectors for Korea and Korea used surpluses of these
sectors in automobile and electronic sectors. And it created world famous brand
in these sectors such as Hyundai and LG.
Moreover, education and usage of
technology contributed success in development of Korea. 98% of people studied
at university. Also internet usage ratio of people was 75 %.
2) Time Series Analysis
2.1) Current Account
Trade Balance
Export
In 1999,
there is not significant change as export increased 9 % during 1998-1999 years.
In 2000, export increased 21 %. This increase was thanks to brisk exports of
semiconductor, information and communication equipments. In 2001, export fell down
14 %. Countries which had economic downturn including major partners such as
United States and slow commodity exports led to decrease of export. In 2002,
there is no significant change in export after one year. In 2003, export had
great increase by 20%. Rising export to China and advanced export to EU and US
during last four months resulted in boost. In 2004, Korea had the biggest soar by
30% over 1999-2008. As boosted commodity export to China and acceleration in
economic growth of advanced countries, especially US, export raised importantly
.In 2005, Export of Korea had slower growth rate because of base period effect.
In 2006, export improved 14% as global economy trended upward. In 2007, boosted
export to emerging countries such as China and developed competitiveness on
Korean products resulted in increase by 14%.
Import
In 1999, Import moved higher due to increases in
capital goods from Japan and oil from Arabic countries. In 2000, Import of Korea has the biggest increase over 1998-2007
since boost rate was 37% in a year. Raised import demand, especially capital
goods, and increase in number of Korean travelling abroad resulted in
increases. In 2001, Korea experienced single drop in this year over 1997-2008.
Global economy was affected by 11 September devastation. Import of goods fell
down 13% because of decreasing capital goods demand and raw materials demand
imported for investments. In 2002 and 2003, import of country increased by 8%
and 18%, respectively. That is, there are no significant changes and situations
during two years. In 2004, the Koreans experienced important advances. Goings
up by capital goods and raw material demand and by upward trends in oversea
travelling and educations led to increases in import. In 2005, “total real
imports increased by only 6.9 percent, affected by the reduced growth rates of
those of raw materials for export use and capital goods”( Annual Report of Bank
of Korean, 2005 ). In 2006, import of Korea had bigger volume than previous
year. Because capital goods and consumer items demands grew, country had jump by
18%. Finally, import of country hadn’t more significant growth than previous
year. Increasing import was 15%.
Net
Service Income
In 1999, there were no significant changes in a year
but service provided abroad exceeded services provided to foreign countries.
That is, net services income turned from surplus to deficit. In 2001, “the
service balance posted a deficit similar to that of the previous year (Annual
Report of Bank of Korean, 2001). In 2002, Korea had the biggest increase in
deficit of net service income by 111%. Arising payments for overseas travel
expenses and business services lead to increase services deficit. In 2003, deficit
of Korea Service Income raised less and deficit fell down and narrowed with
respect to previous year due to increasing in sea-cargo payments. In 2004,
deficit of service income expanded approximately 8%. “Increase in outlays overseas
travel, education abroad and business services, which greatly outweighed
increased earnings from freight transportation resulted in increase of deficit”
(Annual Report of Bank of Korean,2004). In 2005, service account deficit
improved approximately 63%. Payments for education abroad, business services
and overseas travel lead to move higher deficit. In 2006, this year deficit
went up 38% in services account. To similarly previous year, this increase
derived from payments for overseas travel, education abroad and outsourced
business services. In 2007, there is no significant change as deficit increased
4% during 2006-2007 years.
Net Interest Income
In 1999, there importantly was no change as net
interest income changed downward average 8%. In 2001, “the interest income
balance posted a deficit similar to that of the previous year (Annual Report of
Bank of Korean, 2001). During 1999-2001 years, the country experienced deficit
of interest income but it turned balance from deficit to surplus in 2002.
Thanks to lower external interest payment, country had interest income surplus.
In 2003, Korea had lower surplus of interest income but change rate was not
important. In 2004, country experienced widely surplus. Net interest income
raised 231% due to increased income from external interest payments and
dividends. In 2005, “the
income account shifted into deficit owing to the increased payments of
dividends, which offset the rise in external interest income” (Annual Report of
Bank of Korean, 2005). In 2006, country shifted income account into surplus
again. This surplus derived from external interest income including increased
payment of dividend and interest for overseas borrowings. Finally, in 2007,
country has doubled surplus due to increasing external interest income like
similarly previous year.
Current
Transfer Balance
During 1998-2003 there was no important change and stable
in inflows of current transfer but outflows of currents transfer were widening
in Korea owing to increases in unrequited remittances. That is, account had
deficit which trended upward. In 2004, “the current transfers account deficit
decreased owing to increased private sector’s remittances from abroad” (Annual
Report of Bank of Korean, 2004). During 2005, 2006 and 2007 current transfers
were volatile. While transfer balance deficit widened in 2006, it narrowed in
2007.
2.2) Capital Account
Foreign Direct Investment Balance
In 1999, FDI to Korea set new record. The amount was
the highest one in Korean’s history. The Koreans were successful for investment
of European countries and EU countries increased direct investment by 99.5.
Also, local governments had highly efforts in order to increase investments. In
2000, foreign direct investment was similar and stable to 1999. In 2001, terrorist
attack in USA had directly impact to investments. Direct Investment Balance
fell down average 250% like before 1999. In 2002, foreign direct investment
abroad increased while it declined in home country because LG Company made
unusually large investment in Netherlands. In 2003, foreign direct investment
balance was similar to previous year. In 2004, Korea approximately arrived
success level of 1999 and FDI increased by 160% in home countries. According to
Korean Ministry of Strategy and Finance (Weekly Report-November,2004), this
increase was attributable to the steady increase of investment in China and the
growing demand for overseas investment as major economies rebounded. Also, technical
rebound brought outflow of investment. Finally, others years tended to be
similar previous years but both inflows and outflows of investments dropped
importantly.
Foreign Portfolio Investment Balance
In 1999, Daewoo Group, a Korean Company, had troubles.
After restructuring plan of Daewoo, long term market rates increased so sales
of debt securities were on increase. Also, stock prices trended upward trended.
According to Bank of Korean (1999), stock prices continued to move upward thanks
to the inflow of the abundant market liquidity into the stock markets. In 2000,
while inflows of debt securities increased, stock prices decreased so inflows
of equities fell down importantly because of decreasing in investor expectations
and oversupply of stocks with public offering in previous year. In 2001, stock
prices was affected by September 11 devastation and outflows of stocks
increased. Until 2004, balance of equity securities tended to be stable. In
2003, inflows of debt securities moved higher due to primarily
to domestic and overseas expectations for an economic recovery. Until 2006,
balance of debt securities tended to stable. In 2004, lower oil prices and
reduction in call rate resulted lower stock prices and ensured outflows of
equity securities. Generally, KOSPI (Korean Stock Price Index) had upward trend
but Korean investors invested higher abroad so outflows of equity were higher
than inflows. Finally, inflows of debt securities rose by 275% in 2007 as
foreign banks purchases large scale Treasury bond and futures.
Other Investment Balance
Fund flow
of banking sector had importance in
this item. In 1999, bank loans expanded steadily centering on small and medium enterprises,
as bank made efforts to widen lending and lower interest rates in response to
the inflow of funds (Annual Report of Bank of Korean, 1999). In 2000, Korean
financial markets were sluggish and had contradiction so bank’s trust accounts,
deposit-taking by investments banks and merchant banking corporations account
decreased. In contrast, portfolios shifted out and credit-taking by Korean bank
expanded. In 2001, deposit-taking by financial institutions was on increase due
to secondary financial institutions including investment trust companies and
bank’s trust companies. In 2002, deposit accounts were similar to previous
year. In 2006, banks had especially big increase. This increase was
approximately sevenfold. According to Annual Report of Bank of Korean, 2006), “banks
owned to special sales campaigns offering high interest rates and hiked in
deposit interest rates”. Similarly, this trend lasted in 2007.
In
government item, government early paid borrowings from IMF in 2001.
In monetary
authorities’ item, this is related to Korea and IMF relationship. As Korea had
Asian Currency Crisis in 1997, IMF assisted to Korea so repayment increased in
1999 and 2001.
Reserves
Korea has been surplus since 1998 as balance of
payment of Korea had continuously surplus.
Between 1999 and 2007, Bank of Korea used reserve funds only in 1999 and
2001. In 1999, the Bank supplied funds flexibly to stabilize the call market
rate. In 2001, according to Bank of Korea (2001), “the government repaid the
remainder of its borrowings from the International Monetary Fund (IMF) since the
foreign exchange crisis ahead of schedule as its external repayment capacity had
improved thanks to the building up of the foreign exchange reserves”.
3) Cross Sectional Analysis
Korea has continuously been current account surplus
since 1997 so continuous surpluses had high factor in order to expand and
stabilize their economy.
In 1999, Current
account balance had surplus but import was on increase and this change reduced
current account surplus with respect to 1998. Capital account increased
importantly thanks to inflow of foreign direct investment, equity and debt
securities. And this increase had huge impact in increasing overall balance.
In 2000, although
export increased in parallel with import, net service income decreased
significantly so current account balance declined. Capital account balance was
similar to previous year so overall balance declined.
In 2001, current
account surplus fell down as both import and export declined. Capital account
also declined similarly due to decreasing foreign direct investment, repayment
trade credit and early payment of government borrowing from IMF. Overall
balance drop 76% since both capital account and current account had downward
pressure.
In 2002, current
account surplus narrowed due to sharp rise on deficit of net service income. Both
direct investment and portfolio investment declined significantly but other
investment which had huge soar ensured in order to stabilize overall balance with
respect to previous year. And overall balance was similar to previous year.
In 2003,
current account surplus expanded due to huge growth of export. And capital
account surplus was like current account balance. Rises in debt securities
resulted in expanding capital account surplus. Both current and capital account
balances provided to increase overall balance account again.
In 2004,
current account surplus widened more than 2003. Also, capital account surplus
expanded more. And overall balance rose average 50% due to growth of export and
increased foreign investment in home country.
In 2005,
current account balance narrowed thanks to decreasing trade surplus and
increasing service income deficit. Also, foreign direct investment and
securities declined so highly but inflows of other investment increased but it
was not enough to stabilize or expand overall balance so overall balance had
significant downturn.
In 2006,
current account balance narrowed more because trade balance fell and service
income deficit increased. But capital account balance expanded. This was due to
other investment including rise in overseas short-term borrowings by foreign
banks.
Although other investments were average 700% on
increase, overall balance was stabile.
In 2007, current
account balance widened slightly. As export grow up and trade balance had soar,
net service income deficit was enlarged. And capital account narrowed highly.
This was due to “rise in repatriation of stock investment fund from Korea and
Koreans' overseas stock investment (Annual Report of Bank of Korean, 2007) so
overall balance fell down sharply.
References
1. Annual Report of 1999, Bank of Korean
2. Annual Report of 2000, Bank of Korean
3. Annual Report of 2001, Bank of Korean
4. Annual Report of 2002, Bank of Korean
5. Annual Report of 2003, Bank of Korean
6. Annual Report of 2004, Bank of Korean
7. Annual Report of 2005, Bank of Korean
8. Annual Report of 2006, Bank of Korean
9. Annual Report of 2007, Bank of Korean
10. Monthly Report of December, 1999, Ministry of Strategy
and Finance of Korean
11. Monthly Report of December, 2001, Ministry of Strategy
and Finance of Korean
12. Monthly Report of December, 2002, Ministry of Strategy
and Finance of Korean
13. Monthly Report of December, 2003, Ministry of Strategy
and Finance of Korean
14. Monthly Report of December, 2004, Ministry of Strategy
and Finance of Korean
15. Monthly Report of December, 2007, Ministry of Strategy
and Finance of Korean
16. Para Magazine, 02-08 January, 2010
