[YEAR-END REVIEW]Economic turnaround never happened
Korea Herald business staff
If predictions could power growth, Korea's economy would be in full throttle and everyone would be saying "I told you so."
A year ago, policymakers and pundits acknowledged that 2003 was a tough year but confidently predicted a rebound in 2004. Consumers, they assured, would be back in force no later than the June or July.
It never happened.
Instead of economic growth of 5.5 to 6 percent, as policymakers insisted well into the year, the economy will likely post an increase of around 4.7 percent. That is an improvement from the 3.1 percent rise in 2003, but the increase was hardly felt at home.
This year's expansion was one-legged. Exports were the only bright spot, making Korea's gross domestic product, wholly dependent on overseas sales of autos, semiconductors, flat-screens and mobile phones.
The economy grew a solid 5.4 percent in the first half of the year, but the booming exports, unlike the past, did not spark a wave of local corporate investment.
Instead, the "hollowing out" of the manufacturing sector continued, with companies moving to China to take advantage of cheaper wages, less rigid labor regulations and little worker militancy.
When exports slowed in the second half of the year, consumer spending and corporate investment remained absent, failing to help maintain momentum.
The record household debt from the 2000-2002 credit bubble continued to weigh down consumer spending. In the third quarter, it hit a record high of 465 trillion won ($446 billion won), meaning the average family owed 30.4 million won to financial institutions, according to Bank of Korea data.
The job market did not provide much relief to households.
The Roh administration declared job growth its top economic priority this year - and it did achieve its goal of seeing an average of 400,000 jobs added per month, according to the National Statistical Office.
However, the quality of jobs created provided little solace. The government statistics agency said most of the job creation was non-full-time, which pay as much as 40 percent less than full-time jobs.
The Ministry of Labor said that unemployment benefit applications was at a 6-year high of 426,000 in the first 11 months of the year. Among the applicants, 275,160 people had been dismissed, about 55,000 more than in 1998, in the wake of the Asian financial crisis.
In addition, banks tightened lending, That especially affected small and midsize companies. More than six out of 10 of them were experiencing liquidity problems by year's end due to weak sales and rising costs, according to a survey by the Korea Federation of Small and Medium Businesses.
The government reduced taxes and the Bank of Korea cut its benchmark rate to a record-low of 3.25 percent. Both moves failed to produce tangible results.
Record crude oil prices roiled corporations. Korea's benchmark Dubai oil rose more than 30 percent to approach $40 a barrel. The sudden rise in energy costs slammed manufacturers and airlines and fanned inflation.
At the same time, the won strengthened more than 12 percent against the dollar, making it the top performer among major Asian currencies.
To help protect the export-driven economy, BOK intervened seemingly hoping to draw the line at 1050 per dollar. On the other hand, the strong won helped put a lid on inflationary effects, helping budget-strained consumers, who simply did not behave the way officials had predicted.
The Ministry of Finance and Economy initiated several measures to try to overcome low consumer spending and corporate investment.
The ministry cut special sales taxes on cars, golf club and other luxury goods, initiated spending plans, and encouraged investments. Finance Minister Lee Hun-jai even suggested the construction of scores of new golf courses could spark the economy.
Despite the efforts, the economy remained sluggish. A second-half turnaround never materialized, as top government officials predicted as late as August.
In November, Lee admitted for the first time last month that the economy would probably miss the 5 percent growth target the government had set for 2004.
During the year, Lee clashed with Lee Jung-woo, chief of the presidential policy board, who opposed short-term stimulus measures at the cost of a fair distribution of wealth, winning the support from the head of the Fair Trade Commission and the ruling Uri Party's reformists.
The nation's economic chief also often conflicted with Bank of Korea Chairman Park Seung over the central bank's interest rate policy. Lee repeatedly urged rate cuts to stimulate the economy. Although the BOK did reduce its benchmark rate, it emphasized a slower, more cautious approach.
- Sim Sung-tae
Citigroup Inc.'s acquisition of KorAm Bank in April ignited a race among Korean lenders and global banking titans such as HSBC and Standard Chartered to win a bigger share of Asia's third-largest retail banking market.
Local bank chiefs, including Kookmin Bank CEO Kang Chung-won, declared a "war of banks." Domestic lenders rushed to open their new private banking branches, seeking strategic partnership with foreign asset managers.
HSBC and Standard Chartered entered in a race to acquire Korea First Bank. Kookmin Bank established KB Life Insurance in June and Woori Financial Group bought LG Investment & Securities in September, as part of local banks' campaign to enhance their non-banking services.
Amid the whirl of mergers and acquisitions, Korean banks' combined nine-month profit until Sept. 30 tripled from the year-earlier period as they tightened lending rules and decreased provisions to cover risky loans.
The credit-card industry slowly recovered from its record losses in 2003, which stemmed from the nation's 2000-2002 credit bubble.
LG Card received a 5 trillion won bailout in January from its creditors and LG Group, which helped the company turn a monthly profit beginning in September. But by the end of the year it is again was seeking a 1.2 trillion won bailout to remain retain its stock listing.
The benchmark Korea Stock Price Index was close to a 9 percent yearly gain in the last week of trading, but the securities industry suffered from overpopulation and low margins.
Foreign investors accounted for about 23 percent of trading volume and were net buys of shares worth a total of 10.4 trillion won ($9.82 billion), the Korea Stock Exchange said.
Citigroup Inc. acquired KorAm Bank for $2.7 billion in the biggest-ever foreign investment in Korea's financial sector. That fueled the shopping by international banks for local lenders and prompted Korean banks to beef up retail services.
- Kim Ji-ho
BANK of KOREA
Bank of Korea assisted the government's efforts to stimulate the economy by cutting its benchmark intra-bank interest rate twice to a record-low of 3.25 percent.
But the central bank's monetary loosening largely failed to bolster corporate investment, as companies remained reluctant to invest locally amid political uncertainties and a weak business climate.
The central bank also struggled to tame inflationary pressures caused by record crude oil prices and raw material demands. The consumer price inflation rate was expected to finish at around 3.6 percent this year.
The nation's current-account surplus widened sharply thanks to booming exports to major buyers like China and the United States.
The BOK also struggled to slow the Korean won's sharp appreciation against the U.S. dollar. The won strengthened more than 12 percent in the year to mid-December, to lead major Asian currencies. Heavy intervention resulted in swelling foreign-exchange reserves, which hit a record $196 billion - the fourth-largest in the world - as of Dec. 15.
The won's appreciation helped ease inflation concerns by making the nation's imports cheaper. But it also became a source of conflict with economic ministries who wanted to hold down the currency to help local exporters.
- Kim Ji-ho
Exports were the main engine of the economy. By November, this year's value of exports surpassed $200 billion, an unprecedented level by Korean companies.
Information technology products, mobile handsets, flat display panels, autos and semiconductors led the exports. China and the United States were the top destinations.
Export companies also showed more interest in expanding their shipments to the enlarged European Union and Japan. Firms also diversified their goods to be more suitable for those markets.
Despite the stellar performance, the year ended with the rate of export sales growth decelerating and analysts forecasting a weaker 2005.
The strengthening won against the dollar crimped profits made abroad and threatened the price competitiveness of Korean goods overseas. In addition, China, Korea's No. 1 export market, attempted to slow down its overheated economy.
In February, Korea signed a free trade agreement with Chile, the first of its kind. Trying to catch up with other major export-based economies, Korea signed a bilateral trade pact with Singapore in December.
In addition, Korea was in FTA talks with Japan with a target signing of late 2005 and announced plans to begin FTA talks with the Association of Southeast Asian Nations, or ASEAN.
Another area of progress was rice talks. Korea agreed to give nine rice-exporting countries greater access to its market in exchange for a 10-year extension of current tariff waivers.
- Kim Ji-hyun
Korea's big conglomerates expanded overseas investment but were reluctant about investing at home.
In the first half of the year alone, the business groups, or chaebol, invested $1.83 billion in foreign countries, almost double the amount of last year.
The 57-year alliance between two founding families of the LG Group ended with an amicable breakup. The newly established GS Holdings Corp. took charge of LG Group's nine energy and distribution units, including LG-Caltex Oil Corp., LG Mart Co. Ltd. and LG Home Shopping to become Korea's seventh-largest conglomerate.
Without the other units, the original LG Group fell to No.3 spot among conglomerates, behind Samsung Group and Hyundai Automotive Group.
SK Corp., the de facto holding company of No. 4 SK Group, was under assault all year by Monaco-based Sovereign Asset Management Ltd. The equity fund sought to oust the oil refiner's chairman, Chey Tae-won.
Doosan Group emerged as the most likely candidate to acquire Daewoo Heavy Industries & Machinery. If Doosan succeeds in taking over Daewoo Heavy, it will climb a few notches in the chaebol ranking to place ninth.
Doosan also sought to acquire Jinro Ltd, Korea's household name for soju. Lotte Group was also rumored to be interested in buying Jinro.
In March, Hyun Chung-eun, Hyundai Group chairwoman, successfully thwarted a takeover threat by her uncle-in-law, Chung Sang-young, honorary chairman of Kumgang Korea Chemical Co. She was backed by minority shareholders.
- Kim Min-hee
The retail sector suffered from deteriorating sales due to weak consumer demand.
The top three department stores in November suffered their biggest sales slump in eight months.
Combined sales at the nation's top three department stores - Lotte Department Store, Hyundai Department Store and Shinsegae Department Store - dropped 7.2 percent year-on-year, according to the Ministry of Commerce, Industry and Energy.
Discount retailers also suffered a slump in November. Combined sales at the nation's three top discount-store chains in November stood at 2.9 percent, which was also the first drop in eight months.
The retail and credit-card industries waged a months-long dispute over card transaction fees. BC Card, the most widely used card, sought to raise fees at top discounter E-Mart from 1.5 percent to 2 percent in August. That triggered a wave of similar demands from across the card sector.
Card firms claimed a 1.5 percent per transaction fee resulted in a loss for them. The discount retailers and card companies finally agreed to 1.8 percent.
- Yoo Soh-jung
FOOD & BEVERAGE
Low consumer sentiment and by government regulations diluted the whisky industry. From January to November, sales plummeted 19.3 percent to 2,364,294 cases compared to the 2,927,942 cases sold during the same period last year. Each case holds 9 liters.
In October alone, whisky sales of Jinro Ballantines Co. and Diageo Korea plummeted 30 percent and 35 percent, respectively, compared to October 2003.
The government passed a law requiring companies to report any business-related entertainment costs exceeding 500,000 won. It also launched a crackdown on prostitution. Those moves dried up sales at hostess bars, or "room salons."
Creditors led by Goldman Sachs normalized Jinro Ltd., the nation's largest soju distiller, in preparation of selling it in 2005 to a domestic or foreign company. The distiller has been valued at up to 2.5 trillion won.
Frozen food suppliers went into tailspin in June when the Food and Drug Administration reported finding frozen dumplings contaminated with tainted radish. Consumers shunned mandu, the traditional Korean dumpling, and similar products.
Big-name food companies like CJ Corp. and Dongwon F&B were blacklisted and temporarily suffered damage to their corporate image. But a couple of months later, the food regulator cleared all the suspected dumpling makers and declared their products safe to consume.
- Yoo Soh-jung
IT & COMMUNICATION
The information and communication technology sector continued to struggle to keep growth alive in a mature domestic market.
Government-sponsored mobile number portability, which allows mobile-phone users to switch carriers without changing numbers, began in January to level the playing field among Korea's three mobile-phone carriers.
Initially only market leader SK Telecom Co. was under the program. In July, KT Freetel Co. customers were added. LG Telecom Co. was delayed to 2005.
The service sparked overzealous marketing, which led steep year-on-year profit losses and temporary government bans on marketing.
As of November, SK Telecom lost 1.17 million customers to KTF and 800,000 customers to LG Telecom. KTF lost around 470,000 customers to SK Telecom since July while LG Telecom gained around 1 million customers from the two carriers.
Media convergence, or combining traditional voice services with video and data applications under Internet protocol-based backbones, emerged as the next main trend for the wire and wireless telephony industry.
The most anticipated concept was the portable Internet, dubbed WiBro (wireless broadband). It was designed to be more efficient at providing Internet connectivity and mobile data. The government aimed for WiBro commercialization by 2006.
In November, Dacom Corp. withdrew from the WiBro licensing competition, virtually handing the 2005 licenses for the three available spots to SK Telecom, KT and broadband service provider Hanarotelecom Inc..
Another concept was mobile television services, dubbed digital multimedia broadcasting. TU Media Corp., 30 percent owned by SK Telecom, expected to provide satellite-based mobile TV services to the three mobile operators before the end of 2006.
- Kim Tong-hyung
Strict regulations to curb property speculation and the weak economy roiled the construction industry, which had accounted for 17 percent of gross domestic product.
Housing starts nationwide dropped 41.1 percent this year, the lowest since the 1998 currency crisis, according to a report released by the Korea Housing Institute. The think-tank said that 345,000 homes were built this year, far short of the government's target of 500,000 units.
The central Bank of Korea also reported that as many as 86 construction companies filed for bankruptcy in October, the largest monthly figure since December 2001.
The Roh government's capital relocation project was supposed to help revive the depressed construction industry. But hopes were dashed by a Constitutional Court ruling that shelved the project.
Amid the sluggish construction business at home, a number of large construction companies benefited from booming overseas construction demand, particularly in the Middle East.
Demand for plant construction in the Middle East continued to be significant on the back of rising oil prices. Construction contracts there usually guaranteed better profitability for Korean builders, industry insiders said.
- Kim Jung-min
Sluggish domestic demand took a heavy toll on Korea's service industry in 2004, further worsening the unemployment problem.
Inns and small hotels reported sales dropping 10.2 percent year-on-year in October. They reduced losses between March and July, but then deteriorated in September when a crackdown on prostitution began. Fronts for prostitution, including hostess bars and beauty salons and bath houses, also suffered.
The tourist industry rode the popularity of Korean pop culture in Asian. The "Korean Wave" sparked a more than 20 percent increase in foreign visitors to about 5.8 million, the first gain in six years. About 40 percent of the tourists were from Japan.
Still, visitors were concentrated in Seoul and Jeju Island. Room occupancy rate averaged only 40 percent in other regions, with the number of Koreans traveling abroad topping 7 million.
Restaurants had a slow year. In the first nine months, some 150,000 restaurants closed temporarily or permanently. The exceptions to the downturn were restaurants that featured spicy food.
Managers at expensive bars and golf clubs also saw their sales slump with a new tax regulation that required companies to identify entertainment fees surpassing 500,000 won per event.
- Kim Min-hee
SCIENCE & TECHNOLOGY
A major breakthrough in science was made in February when researchers led by Seoul National University scientist Hwang Woo-suk succeeded in obtaining stem cells from cloned human embryos.
The success prompted debate and regulations over the ethics of using embryonic stem cell products for medical purposes.
Human cloning and cross-species experiments were banned. But scientists may conduct embryonic stem cell research aimed at curing 18 specific diseases, including AIDS, cerebral palsy, diabetes, and Alzheimer's.
The potential for stem cell research was reaffirmed in November when a Korean woman paralyzed for 20 years successfully walked again after scientists repaired her damaged spine using stem cells derived from umbilical cord blood.
It was the world's first published case in which a patient with spinal cord injuries had been successfully treated with stem cells from umbilical cord blood.
- Kim Tong-hyung
Higher oil prices and currency fluctuations highlighted the airline's vulnerability to external shocks throughout the year.
However, strong flight demand and yield growth propped up earnings, offsetting the higher fuel cost burden.
Korean Air Lines Co. and Asiana Airlines Inc. posted a record high quarterly revenue growth on the booming traveling demand and the strong cargo traffic.
The two airlines' strategic efforts included streamlining unprofitable domestic routes and expanding lucrative short-haul international passenger flights. The routes to China and Japan guaranteed better profitability than the long-haul flights to the United States and Europe, according to aviation experts.
In September, Korea and Taiwan signed an aviation agreement to resume regular airline services between the countries, allowing the nation's two airline carriers to resume regular services beginning December.
Flights were halted in September 1992 when Taiwan abrogated the aviation pact to protest Seoul's establishment of diplomatic relations with China.
- Kim Jung-min
The nation's sluggish economy dented domestic car sales but Korean automakers had solid performance overseas.
Domestic auto sales dropped 18.1 percent year-on-year to 996,542 units from January to November. But in the same time, the exports of the nation's five carmakers jumped 31.5 percent year on-year to 2.12 million units.
The "Big 3" carmakers - Hyundai, Kia Motors Corp. and GM Daewoo Auto & Technology Co. - expanded their overseas operation this year to offset losses at home. The companies generated more than 70 percent of their revenue from exports.
Hyundai in September announced its plan to build a second plant in China. In April, Kia broke a ground on its first European plant in Slovakia.
GM Daewoo, the nation's No.3 carmaker, has used local plants only to meet growing demands abroad. The company's exports jumped 89.1 percent on-year to 413,720 units from January to November, the largest gain among local players.
Meanwhile, foreign carmakers such as BMW and Lexus further expanded their turf in the high-end segment. During the 11-month period, imports gained 18.8 percent from a year earlier to 20,847 units.
- Kim Tae-gyun
Korea is the home to the world's three largest shipbuilders: Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co., and Samsung Heavy Industries Co. Ltd. Experts say the nation's ship sales this year will reach $12 billion.
Moreover, Korea's shipbuilders' orders have dockyards booked up until 2006. They are building 300,000-ton behemoths that contain cutting-edge technology, a huge leap from the 2,600-ton vessels that were built when the Korean shipbuilding industry began in the 1960s.
This year's boom was mainly due to the strong demands from growing Asian economies. In particular, China sharply increased its imports of iron ore, grain, and other commodities and encouraged shipping lines to buy more vessels.
Industry analysts also attributed the strong sales to changed shipping regulations in Europe, which require the replacement of single-hull tankers with double-hull ones to help prevent oil spills after accidents.
The local shipbuilders stepped up efforts to overhaul its business structure. The companies increased manufacture of high-value-added products such as Liquefied Natural Gas tankers, and expanded into new business areas like robot industry.
- Kim Tae-gyun
A worldwide surge in the price of raw materials triggered by bursting demand sent steel prices up this year to record-high levels, causing alarm for Korean manufacturers depending heavily on the material.
During the months of July, August and September, steel prices peaked to $530-560 per metric ton of steel bars on the climbing prices of iron ore, coal, crude oil and other materials. Later in October, prices stabilized to $500 to $530.
In particular, China, with its 9 percent growth, had an insatiable demand for to build its infrastructure and office buildings, devouring about one-third of the world's supply.
To cope with the shortages and high-flying prices, pressure was applied on Korean steelmakers to cut down exports and step up supplies.
However, steel manufacturers came under fire for raising prices as industries struggled with a weak economy. POSCO repeatedly raised the price of steel sheets for both cars and ships despite posting record earnings. The company claimed its prices merely reflect the global trend.
- Kim Ji-hyun
FAIR TRADE COMMISSION
The Fair Trade Commission and large conglomerates, or chaebol, engaged in a long tug-of-war over a bill on the revision of the fair trade law this year.
Under the bill, approved by the National Assembly on Dec. 9, the fair trade watchdog will maintain the current limit on equity investment by conglomerates and limit their financial units' voting rights.
Big business groups warned that the legislation will lay the welcome mat to foreign takeovers of top Korean companies. They also argued that the revised law would further discourage corporate investment.
Ruling Uri Party lawmakers, however, said the revised law was necessary to harness the influence of conglomerates, to protect consumers and small and midsize companies.
A FTC commission report said the heads of most family-owned conglomerate held a less than 2 percent stake in their business empire, calling it a "severely distorted ownership structure." The report also said that relatives of the corporate chiefs held only 2.66 percent of the shares in the family business group.
This was supplanted by a nearly 42 percent control exercised by the owner°Ψs family through cross-share holdings of affliliate, the report said.