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Vol. 31 | No. 10
Republic of Korea
Economic Bulletin
Policy Issues
Short-term and mid-term plans for fiscal management:
Budget plans for 2009-2013 and for 2010 40
Statistical Appendices 51
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Overview
The Korean economy slowed the pace of recovery in July and August as policy measures
which boosted the economy in the first half became less influential. However, in September
the economic indicators improved, in particular those related to exports.
In August, mining and manufacturing production rose 1.2 percent year-on-year, posting an
increase for the second consecutive month, while the month-on-month indicator fell 1.3
percent, affected by summer vacations. Service output also decreased 0.6 percent month-
on-month, but on a year-on-year basis, it gained 1.1 percent, registering an increase for the
fifth month in a row.
Consumer goods sales fell 0.3 percent month-on-month in August, due to a drop in durable
goods sales including automobile sales, whereas year-on-year consumer goods sales gained
2.0 percent, rising for four straight months.
Facilities investment continued to drop year-on-year in August, tumbling 16.6 percent, while
the indicator gained 2.8 percent month-on-month, positively affected by machinery
investment. Construction completed slid 4.4 percent month-on-month, or 6.8 percent year-
on-year, due to poor performance in the private sector.
Exports in September sharply slowed its year-on-year fall from 20.9 percent a month ago to
6.6 percent, as major exports such as semiconductors and automobiles continued to
improve, and the number of working days increased.
The total number of workers hired gained 3,000 in August, shifting to a rise from the
previous month’s loss of 76,000, thanks to government’s job creating measures, while
unemployment stayed at the previous month’s level of 3.7 percent.
Year-on-year consumer prices in September stayed at the similar level to the previous
month, rising 2.2 percent year-on-year, as stabilizing agriculture, livestock & marine product
prices offset an increase in petroleum prices.
In September volatility in domestic financial markets grew as capital inflows from abroad
increased, which affected stock prices, interest rates, and foreign exchange rates.
To sum up, although the domestic economy improves steadily, the private sector still shows
weak recovery and downside risks including a possible delay in global economic turnaround
exist.
The Korean government will keep pursuing expansionary fiscal policies, while making up for
the decreased second half fiscal capabilities by minimizing the 2009 budget transferred to
2010 or left unspent and expanding public firms’ investment, as uncertainties surrounding
the economic situation remain. On the other hand, measures to create jobs, support the
working class, and boost consumption and investment will be carried out as planned, along
with close monitoring of the economy to detect any signs of instability, in particular the
overheated real estate market.
Economic Bulletin 3
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1. Global economy
The global economy is showing signs of bottoming out of the recession as indicators
reflecting the real economy have been improving in developed countries such as the US,
Japan and eurozone. On October 1, the IMF revised up the outlook for the global economy to
a contraction of 1.1 percent for 2009 and an increase of 3.1 percent for 2010, a 0.2
percentage points upward adjustment to the outlook released in August, a 1.3 percent
shrinkage for 2009 and 2.9 percent growth for 2010.
US
The US economy saw the real GDP in the second quarter revised upward from an annualized
drop of 1.0 percent to 0.7 percent.
Following the positive turnaround in July for the first time in 10 months, August industrial
production rose 0.8 percent month-on-month, led by the auto industry.
Although existing home sales remained sluggish in August, declining 2.7 percent month-on-
month, new home sales expanded 0.7 percent and the home price stayed on an upward
trajectory since May 2009.
Job markets remained depressed, despite non-farm payrolls in August decelerating the
decline, as unemployment stayed at the 9.0 percent range, registering 9.7 percent and 9.8
percent in August and September, respectively.
The Federal Reserve, at the Federal Open Market Committee (FOMC) in September,
maintained the target range for the federal funds rate at 0.0 to 0.25 percent, and announced
that it would gradually slow the pace of purchasing US$1.25 trillion of mortgage backed
securities and US$200 billion of agency debt.
The Federal Reserve, at the FOMC meeting, evaluated that the US economy was picking up,
as conditions in financial markets improved and activity in the housing sector increased. The
Fed also predicted that household spending would be stabilizing, but remained constrained
by ongoing job losses and tight credit.
4 October 2009
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Economic Bulletin 5
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China Despite exports continuing to be sluggish, China’s economy grows steadily led by domestic
demand, thanks to brisk investment and consumption, which facilitate the production
indicators improving. In August, the consumer price slowed the decline, while home prices
rose for three months in a row.
Japan
Although Japan’s economy saw the second quarter growth revised down from a 0.9 percent
expansion to 0.6 percent on a quarter-on-quarter basis, month-on-month industrial
production increased for the sixth consecutive month in August. Unemployment fell from the
preceding month’s 5.7 percent to 5.5 percent, while exports gradually slowed the decline.
(Percentage change from previous period)
2007 2008 2009
Annual Annual Q1 Q2 Q3 Q4 Q1 Q2 Jul Aug
Real GDP 2.3 -0.7 0.9 -0.7 -1.3 -3.4 -3.3 0.6 - -
Industrial and mining production 2.8 -3.4 -0.7 -0.8 -1.3 -12.0 -22.2 8.3 2.1 1.8
Retail sales (y-o-y, %) -0.1 0.3 1.8 0.2 0.8 -1.5 -3.9 -2.8 -2.4 -1.8
Exports (y-o-y, %) 11.5 -3.5 5.9 1.8 3.2 -23.1 -46.9 -38.5 -36.5 -36.0
Consumer prices (y-o-y, %) 0.0 1.4 1.0 1.4 2.2 1.0 -0.1 -1.0 -2.3 -2.2
Eurozone Indicators reflecting the real economy such as industrial production, retail sales and exports
are decelerating the fall in the eurozone economy. The Purchasing Manager’s Index (PMI)
landed at 51.1 in September, hitting the highest since May 2008, while the Business
Confidence Index rose for the fifth straight month, standing at 80.6.
(Percentage change from previous period)
2007 2008 2009
Annual Annual Q1 Q2 Q3 Q4 Q1 Q2 Jul Aug
Real GDP 2.7 0.8 0.8 -0.3 -0.3 -1.8 -2.5 -0.1 - -
Industrial production 3.7 -1.8 1.8 -2.2 -2.8 -6.2 -7.5 -3.0 -0.3 -
Retail sales 1.5 -0.8 0.1 -0.6 -0.6 -0.7 -0.8 -0.3 -0.2 -0.2
Exports (y-o-y, %) 11.1 3.7 6.8 8.5 5.7 -5.0 -21.3 -24.0 -19.3 -
Consumer prices (y-o-y, %) 2.1 3.3 3.3 3.6 3.8 2.3 1.0 0.2 -0.7 -0.2
6 October 2009
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Economic Bulletin 7
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2. Private consumption
Private consumption (preliminary GDP) in the second quarter posted a quarter-on-quarter
increase of 3.6 percent, and a year-on-year decline of 0.8 percent.
Consumer goods sales in August fell month-on-month for the second month in a row, down
0.3 percent, but rose 2.0 percent year-on-year, posting an increase for four straight months.
On a month-on-month basis, durable goods sales and non-durable goods sales fell 0.7
percent and 1.5 percent, respectively, whereas semi-durable goods sales rose 3.3 percent.
On a year-on-year basis, sales of durable goods such as automobiles gained 5.5 percent,
while those of semi-durable goods and non-durable goods increased 0.2 percent and 1.3
percent, respectively.
Sales at department stores continued to improve, rising 7.1 percent year-on-year, while sales
at large discounters decelerated the fall at 0.4 percent.
8 October 2009
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Economic Bulletin 9
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Domestic credit card spending rose 14.7 percent, registering a double-digit growth for two
months in a row since August.
Sales at department stores gained 8.5 percent, posting an increase for seven consecutive
months. However, sales at large discounters continued to fall.
Domestic sales of Korean cars soared 76 percent year-on-year, thanks to release of new
cars, tax breaks and a low base effect, while gasoline sales fell slightly.
10 October 2009
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Economic Bulletin 11
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3. Facility investment
Facility investment (preliminary GDP) in the second quarter posted a year-on-year loss of 15.9
percent and a quarter-on-quarter gain of 10.1 percent.
Month-on-month, facility investment rose 2.8 percent, despite a 4.2 percent fall in
transportation equipment investment, thanks to a 5.4 percent increase in machinery
investment.
(Percentage change from same period in previous year)
2007 2008 2009
Annual Annual Q4 Q1 Q2 Jun Jul1 Aug1
Facility investment (estimated) 8.2 -4.3 -13.4 -17.7 -13.4 -4.9 -18.8 -16.6
(Seasonally adjusted) 2
- - -9.3 -11.6 6.6 10.4 -12.3 2.8
- Machinery 7.5 -5.7 -14.5 -21.9 -19.5 -13.5 -24.4 -22.0
- Transportation equipment 11.3 1.5 -9.0 0.4 11.3 31.7 2.1 7.2
Domestic machinery orders 20.6 -5.5 -47.3 -33.8 -14.1 2.1 7.3 -16.8
- Public -11.4 4.9 -3.5 150.5 30.9 45.1 498.8 -15.7
- Private 24.5 -6.2 -53.9 -42.9 -18.5 -6.2 -32.9 -16.9
Machinery imports 21.7 18.9 6.3 -28.0 -27.7 -27.7 -26.6 -25.7
Facility investment 1.7 -2.2 -15.6 -18.9 -8.5 -3.6 -1.7 -1.6
adjustment pressure3
1. Preliminary
2. Percentage change from previous period
3. Production growth rate minus production capacity growth rate in the manufacturing sector (%p)
2009
Business survey indices (base=100)
Jun Jul Aug Sep Oct
Manufacturing facility investment results 93 95 96 99 -
Manufacturing facility investment projections 91 94 97 95 100
Source: The Bank of Korea
12 October 2009
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Economic Bulletin 13
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4. Construction investment
Construction investment (preliminary GDP) in the second quarter rose 3.7 percent year-on-
year, or 1.7 percent quarter-on-quarter.
(Percentage change from same period in previous year)
2007 20081 20091
Annual Q4 Annual Q1 Q2 Q3 Q4 Q1 Q2
Construction investment2 1.4 0.4 -2.1 -1.9 -0.3 0.2 -5.6 1.6 3.7
(Seasonally adjusted) 3
- 2.9 - -2.5 -0.3 0.1 -3.0 5.2 1.7
- Building construction -0.0 0.7 -4.3 -1.2 -0.1 -0.1 -14.3 -11.1 -3.5
- Civil engineering works 3.8 -0.1 1.3 -3.2 -0.7 0.7 5.7 24.9 14.3
1. Preliminary
2. National accounts
3. Percentage change from previous period
In August, construction completed (current value) slid for the second straight month, as the
indicator in the public sector decelerated the rise and that in the private sector accelerated
the fall. By type of works, construction completed in building constructions dropped 10.5
percent year-on-year, and that in the civil engineering works fell 0.1 percent.
14 October 2009
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Economic Bulletin 15
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The improvement was attributed to increases in major exports and working days (up 1.5
days). In addition, factors negatively affecting exports in the previous month were settled,
including a decline in vessel exports, summer holidays and a labor union strike in the auto
industry.
While most exports declined at a slower rate, semiconductors (up 22.8%), automobiles (up
20.5%) and liquid crystal devices (up 29.4%) posted a double-digit growth.
By regional category, exports to China (up 4.0%) and the Middle East (up 1.3%) shifted to an
increase, while exports to other regions slowed the fall.
(US$ billion)
2008 2009
Annual Sep Jan-Sep Q1 Q2 Jun Jul Aug Sep Jan-Sep
Exports 422.01 37.43 328.94 74.41 91.00 32.63 31.99 28.97 34.97 261.34
(y-o-y, %) 13.6 27.6 22.6 -25.2 -20.5 -12.4 -21.9 -20.9 -6.6 -20.6
Average daily exports 1.53 1.66 1.61 1.10 1.31 1.39 1.28 1.26 1.46 1.25
Imports 435.27 39.53 343.75 71.36 73.43 25.36 27.62 27.26 29.60 229.27
(y-o-y, %) 22.0 45.4 34.1 -32.7 -36.0 -32.9 -35.7 -32.2 -25.1 -33.3
Average daily imports 1.58 1.76 1.68 1.05 1.05 1.08 1.10 1.19 1.23 1.10
Trade balance -13.27 -2.1 -14.81 3.06 17.57 7.20 4.37 1.70 5.37 32.07
Imports in September fell 25.1 percent year-on-year to US$29.60 billion. Compared with the
first half, imports dropped at a slower pace, led by capital goods and consumer goods.
The trade balance in September posted a surplus of US$5.37 billion, staying in the black for
eight straight months since February 2009.
16 October 2009
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Economic Bulletin 17
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By business category, semiconductors and parts (up 22.7%), and transportation devices (up
11.6%) continued to improve year-on-year, while machinery (down 16.0%) and automobiles
(down 2.8%) declined.
Shipments decreased at a slower pace year-on-year from 1.2 percent a month ago to 0.9
percent, while the level of inventory fell more gently from the previous month’s 14.7 percent
to 14.1 percent.
By business category, the shipments of semiconductors and parts (up 12.1%) and
transportation devices (up 8.7%) posted a year-on-year increase. The inventories of
semiconductors and parts (down 35.0%), computers (down 31.5%) and machineries (down
15.7%) were down.
Judging from the shipment/inventory cycle and inventory to shipment ratio, the economy
continued to move towards a recovery phase with inventory adjustment nearing an end.
Manufacturing Average operation ratio (%) 77.2 80.4 78.4 65.8 73.7 76.6 78.8 77.6
activity Production capacity 5.2 6.5 5.3 2.5 1.9 2.2 2.7 2.8
1. Preliminary
2. Including mining, manufacturing, electricity and gas industry
3. End-period
In September, mining and manufacturing production is likely to improve from the previous
month, given recovering exports and increased working days as Chuseok holidays fell on
October this year.
18 October 2009
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6-3 Inventory
Source: Korea National Statistical Office (industrial activity trend)
Economic Bulletin 19
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By business category, financial & insurance services (up 10.9%), real estate & renting
services (up 10.6%) and healthcare & social welfare services (up 9.5%) led the year-on-year
increase in the service sector.
Meanwhile, entertainment, cultural & sports services (down 6.5%), educational services
(down 6.3%) and hotels & restaurants (down 5.4%) declined from a year earlier.
Service activity in September is expected to stay on an upward track. Financial & insurance
services and healthcare & social welfare services are continuing a long-term increase while
whole & retail sales and transportation services, which had remained weak, stayed on a
recovery trajectory. Robust car sales and credit card spending as well as the recovery in the
job market are also boosting the service sector.
20 October 2009
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Economic Bulletin
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8. Employment
The number of workers on payroll in August climbed by 3,000 from a year earlier, on the
back of the government’s policy efforts to create jobs.
The employment rate stood at 58.8 percent, down 0.8 percentage points compared to the
same month of the previous year. The unemployment rate rose 0.6 percentage points year-
on-year to 3.7 percent, while that of youths aged 15 to 29 was up 1.1 percentage points from
a year earlier to 8.2 percent.
22 October 2009
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Economic Bulletin 23
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9. Financial market
The KOSPI set a new record high this year at 1,718.88 points on September 22, as the
Financial Times Stock Exchange (FTSE) upgraded the status of the Korean stock market to
“developed” from “advanced emerging”, and domestic blue chip companies were expected
to improve their performance. The increase, thereafter, was subdued as institutional
investors including investment trust companies sold stocks triggered by increased fund
redemption by individual investors.
Foreign investors continued their massive net-buying of Korean shares since July with the
amount during the July-August period posting 14.3 trillion won, which accounts for 57.6
percent of net purchasing by foreign investors so far this year.
During the month, the euro’s value against the dollar rose 2.4 percent from US$1.4282 at the
end of the previous month to close the month at US$1.4630.
The won/yen exchange rate also fell to the lower 1,300 won range with the appreciation of
won.
(End-period)
2006 2007 2008 2009
Dec Dec Dec Aug Sep Change1
Won/Dollar 929.8 936.1 1,259.5 1,248.9 1,178.1 6.9
Won/100Yen 783.4 828.6 1,396.8 1,345.8 1,315.6 6.2
1. Appreciation from the end of the previous year (%); the exchange rate is based on the closing price at 3:00 p.m., local time.
24 October 2009
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Economic Bulletin 25
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Although the Bank of Korea decided to hold its key interest rate steady at 2.0 percent on
September 10, bond yields showed a short-term surge as the central bank signaled a
possible rate hike. The jump in yields, however, was subdued with foreign investors’ net-
selling of KTB (Korea Treasury Bond) futures.
On September 10, yields on Treasury bonds with a 3-year maturity were up 21 basis points to
4.50 percent from 4.29 percent a day earlier.
(End-period)
2005 2006 2007 2008 2009
Dec Dec Dec Dec Jul Aug Sep Change1
Call rate (1 day) 3.76 4.60 5.02 3.02 1.95 1.99 2.00 -102
CD (91 days) 4.09 4.86 5.82 3.93 2.41 2.57 2.75 -118
Treasury bonds (3 yrs) 5.08 4.92 5.74 3.41 4.26 4.38 4.39 98
Corporate bonds (3 yrs) 5.52 5.29 6.77 7.72 5.68 5.61 5.53 -219
Treasury bonds (5 yrs) 5.36 5.00 5.78 3.77 4.76 4.91 4.81 104
1. Basis point changes in August 2009 from end December 2008
In August, bank deposits turned to a surge due to money inflow from redemption of funds
and a withdrawal of money market funds (MMFs) by investors. Banks’ hike of deposit rates
also contributed to a sharp increase in bank deposits.
Asset management company (AMC) deposits declined at a slower pace as money inflow into
MMFs fell by 6.5 trillion won and individual investors redeemed more funds.
26 October 2009
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Economic Bulletin 27
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The goods account surplus shrank to US$3.46 billion from US$6.13 billion a month earlier
due to decreased exports of vessels, summer holidays and a setback in car exports following
a labor union strike.
The service account posted a deficit of US$1.79 billion, a similar level to the previous
month’s US$1.89 billion, as the travel account deficit swelled during summer vacations.
The income account surplus expanded to US$590 million after posting US$480 million in the
previous month, due to a decrease in interest and dividend payment.
The current transfer account deficit contracted to US$220 million from the previous month’s
US$360 million, due to a decrease in contributions to international organizations.
(US$ billion)
2008 2009
Annual Q1 Q2 Q3 Q4 Q1 Q2 Jul Aug Jan-Aug
Current account -6.41 -5.21 -0.13 -8.58 7.52 8.58 13.17 4.36 2.04 28.15
- Goods balance 5.99 -1.22 5.72 -3.48 4.97 8.35 17.63 6.13 3.46 35.56
- Service balance -16.73 -5.07 -4.27 -5.69 -1.70 -1.88 -4.02 -1.89 -1.79 -9.56
- Income balance 5.11 1.69 -0.65 1.36 2.71 0.83 0.18 0.48 0.59 2.08
- Current transfers -0.77 -0.61 -0.94 -0.77 1.55 1.28 -0.61 -0.36 -0.22 0.10
The capital and financial account in August posted a net inflow of US$5.06 billion.
The direct investment account contracted the net outflow to register US$110 million from the
previous month’s net outflow of US$1.14 billion due to a decrease in overseas investment by
locals.
The portfolio investment account shrank the net outflow to record US$3.96 billion from
US$7.94 billion a month earlier as foreigners’ investments in the Korean bond market
decreased.
The financial derivatives account deficit expanded from the previous month’s US$270
million to post US$720 million, as payments related to overseas financial derivative
transactions increased.
The other investment account shifted to a net inflow of US$1.88 billion from the previous
month’s net outflow of US$4.38 billion, affected by the International Monetary Fund (IMF)’s
allocation of Special Drawing Rights (SDR) equivalent to US$3.38 billion.
The current account is likely to record a surplus of around US$5 billion in September as the
trade balance posted a surplus of US$5.4 billion.
28 October 2009
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Economic Bulletin 29
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11.1 Prices
Consumer prices in September rose by 0.1 percent month-on-month and 2.2% percent year-
on-year.
The overall price index was up 0.1 percent month-on-month as oil product prices and
personal service charges showed strength while overall prices for agricultural, livestock and
fishery products went down. Prices of agricultural, livestock and fishery products declined
0.4 percent from the previous month due to favorable supply conditions such as good
weather conditions and the won’s appreciation.
Prices of oil products increased 0.7 percent from a month earlier as the increase of international oil
prices in August was reflected with the time lag despite the freeze on LPG price in September.
Public utility charges remained steady without any significant price increase factors.
Personal service charges held steady as some services which applied a high season surcharge
during the summer holidays returned to their normal levels, while education fees such as university
tuition fees and meal service fees have been raised.
Core consumer prices, which exclude the prices of oil and agricultural products, rose by 2.7 percent
year-on-year. Consumer prices for basic necessities, a barometer of perceived consumer prices, were
up 1.7 percent compared to the same month of the previous year.
30 October 2009
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11-1 Prices
Source: Korea National Statistical Office (consumer prices, core inflation) & The Bank of Korea (producer prices)
Economic Bulletin 31
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Despite the decrease in international prices of oil products as well as the won’s appreciation,
domestic prices of oil products rose as increased international oil prices were reflected with
the time lag.
(Won/liter, period average)
2006 2007 2008 2009
Annual Annual Annual Dec Apr May Jun Jul Aug Sep
Gasoline prices 1,492 1,526 1,692 1,329 1,551 1,543 1,607 1,639 1,670 1,681
Diesel prices 1,228 1,273 1,614 1,303 1,330 1,320 1,389 1,428 1,447 1,453
Source: Korea National Oil Corporation
Prices of overall non-ferrous metals went down month-on-month due to profit-taking after a
short-term surge and increased inventory. Lead prices, however, soared as production
facilities were closed due to lead poisoning cases, which occurred in China.
Grain prices moved downward as the harvest season begins in the US and concerns over
damages caused by frost eased. In particular, prices of wheat fell to a record-low level since
October 2006.
Reuters index*
(Period average)
2006 2007 2008 2009
Annual Annual Annual Dec Apr May Jun Jul Aug Sep
2,019 2,400 2,536 1,767 1,942 2,099 2,117 2,082 2,159 2,049
* A weighted average index of 17 major commodities
32 October 2009
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Economic Bulletin 33
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The Seoul metropolitan area, however, significantly decelerated the weekly upward trend
after the government extended the mortgage-lending regulations, which previously was
applied only in the parts of the Gangnam area, to the entire Seoul metropolitan area starting
September 4.
Although the average rental prices in September continued its upward trend for seven
consecutive months, apartment rental prices decelerated the upward pace after mid-
September as transactions have decreased ahead of Chuseok holidays.
Apartment sales transactions in August decreased to post 80,922, affected by weak demand
during the low season.
34 October 2009
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Economic Bulletin 35
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Affected by the good news on development projects, land prices in the Seoul metropolitan
area showed a significant price increase as Seoul, Gyeonggi province and Incheon saw
prices rising by 0.63 percent, 0.40 percent and 0.41 percent, respectively.
Nationwide land transactions in August expanded 18.0 percent or 31,000 land lots from a
month earlier to 206,000 land lots. In terms of gross area, land transactions were up 6.1
percent.
Land transactions in green belt sites increased by 92.2 percent to 1,787 land lots year-on-
year with expectations that the government would designate those areas as sites to build
Bogeumjari Houses, affordable public apartments for low-income households. Among such
areas, land transactions in Gyeonggi province expanded the most to 784 land lots.
36 October 2009
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Economic Bulletin 37
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The domestic shipment index, the mining & manufacturing production index, the
manufacturing operation ratio index, and the wholesale & retail sales index contributed to
the increase.
Components of the cyclical indicator of coincident composite index in August 2009 (m-o-m)
Domestic shipment index (2.4%), mining & manufacturing production index (2.1%), manufacturing operation
ratio index (2.1%), wholesale & retail sales index (1.5%), volume of imports (1.4%), number of non-farm
payroll employment (0.3%), service activity index (0.0%), value of construction completed (-2.2%)
The year-on-year leading composite index, which foresees the future economic conditions,
went up 1.2 percentage points month-on-month in August, running on an upward track since
January.
The composite stock price index, the ratio of job openings to job seekers, the consumer
expectations index, and the volume of capital goods imports were up.
2009
Jan Feb May Jun1 Jul1 Aug1
Coincident composite index (m-o-m, %) -1.9 0.0 0.8 2.1 1.3 0.8
Cyclical indicator of coincident composite index 92.4 92.0 93.8 95.4 96.2 96.7
(m-o-m, p) -2.2 -0.4 0.3 1.6 0.8 0.5
Leading composite index (m-o-m, %) 0.3 1.1 2.1 2.6 1.4 0.9
12 month smoothed change
-4.0 -2.9 2.6 5.8 7.8 9.0
in leading composite index (%)
(m-o-m, %p) 0.1 1.1 2.5 3.2 2.1 1.2
1. Preliminary
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Economic Bulletin 39
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Policy Issues
Short-term and Mid-term Plans for Fiscal Management:
Budget Plans for 2009-2013 and for 2010
Key policies
Between 2009 and 2013, Korea is expected to see an annual increase of 5.6 percent in
revenue, and the government planned fiscal spending at more than 1.0 percent less than the
revenue increase. Korea’s fiscal deficit will decrease every year to hit the balance between
2013 and 2014, while the national debt standing at mid-30 percent to the GDP.
On the revenue side, the government will pursue a broader tax base and lower tax rates.
The current tax exemptions and reductions will be examined from scratch: Less tax breaks to
be offered to high income earners and large corporations, and as much as possible tax
benefits to be provided to low income earners, farmers, fishermen and SMEs. To raise
transparency in taxation, self employed professionals, business persons, and owners of
businesses in which transactions are mainly made in cash, will be specially paid attention to.
Eco-friendly taxation will be introduced, which will apply higher tax rates to higher energy
consuming products.
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Budget in brief
Economic Bulletin 41
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The government’s budget spending for 2010 prioritizes stabilizing public livelihood and
developing growth potential.
Fiscal policies to boost the economy will continue in 2010, but at the same time fiscal
soundness, which has been worsening amid efforts to overcome the crisis, will be more
actively taken care of from a mid-term perspective.
Total expenditures of the new budget including public funds are 291.8 trillion won, a 2.5
percent increase from the 2009 budget, which will be mainly allocated 1) to help the
economy turn around and enhance growth potential, 2) bolster public livelihood support and
create more jobs, and 3) raise the level of law compliance and Korea’s status in the
international community.
Compared with the total budget of 2009 including the supplementary one passed at the
National Assembly last April, the 2010 budget is less than that by 3.3 percent. However, the
planned 2010 budget is 6.6% more than the 2009 budget planned before the global
economic crisis.
Total revenue is expected to decrease 1.1 percent to 287.8 trillion won from the 2009 main
budget. Given that, the government needs to more efficiently spend budgets by
restructuring annual expenditure, while pursuing fiscal stability in the mid-term.
On the expenditure side, the Korean government reduced the number of projects fueled by
the government by eliminating similar ones to more effectively spend budgets, while
examining the temporary projects funded by the 2009 supplementary budget in terms of
whether they are really in need of government funding, and how effectively the budget is
spent. To deliver government support more efficiently and effectively, social welfare
spending will be managed under a consolidated system.
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On the revenue side, the government will broaden the source of resources and take
advantage of the private sector in terms of creativeness and efficiency. This will include
promoting private sector’s investment, expanding public firms’ investment, reducing tax
exemptions and cuts, and utilizing the Land Bank system.*
*Land Bank : Land Bank is a policy measure by which the government can hold, manage and develop
properties to be used for a public purpose at the right time. The measure contributes to
supplying properties for SOC construction and industrial development at reasonable
prices, and stabilizing the real estate market.
Budget allocation
The 2010 R&D investment will be increased 10.5 percent to 1.36 trillion won from 2009,
reflecting the mid-term plan that the level of R&D investment will reach 1.5 folds from 2008
to 2012. The investment will mainly be made in basic science, new growth engines, and
green technologies.
Investment in SOC projects will mainly cover water resources development including the
“Four River Restoration Project” and railroad related projects, which are part of the “Low
Carbon Green Growth Agenda”, moving a focus away from road construction, the SOC Korea
has relatively enough of.
Economic Bulletin 43
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The level of increase in budgets allocated to health and welfare exceeds three times of a
total expenditure increase in order to help support the working class and the vulnerable. In
addition, 550 thousand jobs will be offered in the public sector, taking into account the
employment improving slower than the economic turnaround.
South-North Cooperation Fund of the 2009 level was set aside, which covers humanitarian
support such as food and fertilizer, in preparation for South-North relations returning to
normal.
The size of BTL projects in 2010 will be around 3.6 trillion won in seven areas. The SOC
investment will be selectively made where such an investment is urgently needed to improve
public lives: construction of schools, military residence, and sewage pipes. To attract private
investments, the government will offer better conditions for funding SOC projects and
expand subsidiary projects linked to the main projects.
* BTL is a kind of public private partnership (PPP). The ownership of the infrastructure facilities will be
transferred to the central or a local government upon the completion of construction, and the
concessionaire will have the right to operate the infrastructure facilities for a specified period of time
while the central or a local government gains revenues from the facilities by leasing the facilities from
the concessionaire.
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Economic
News Briefing
Korea will host a G20 summit in November next year. The leaders of the G20 unanimously
agreed on September 25 in Pittsburgh to hold two rounds of summits next year, one in South
Korea and the other in Canada. Canada will host the fourth meeting in June 2010, and Korea
will hold the fifth. Korea is also set to take the chairmanship of the G20 summit in 2010.
The leaders agreed to convene G20 summits every year and concurred to replace the G8
with the G20 as the permanent council for economic cooperation and coordination,
reflecting the increased presence of emerging economies.
Meanwhile, the leaders of the G20 nations adopted a joint statement calling for the G20
meeting to be the premier forum for the international economic cooperation. The leaders
pledged to sustain a strong policy response until a durable recovery is secured, and avoid
any premature withdrawal of stimulus. At the same time, the leaders vowed to prepare exit
strategies in a cooperative and coordinated way. In addition, they agreed to launch a
framework that lays out measures to generate strong, sustainable and balanced global
growth.
Economic Bulletin 45
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The Financial Times Stock Exchange (FTSE) upgraded Korea’s stock market status to
“developed” from “advanced emerging” in September 2009, giving the market the potential
to attract more foreign investment. The London-based group decided in September last year
to include Korea in the list of developed world indices in its annual review of market
classification, which was scheduled to be effective in September this year. The Korean stock
market is expected to see a net inflow of around US$21.3 billion affected by the promotion in
the mid to long term after portfolio rebalancing, according to an estimate by the Korea
Exchange.
On October 2, the International Monetary Fund (IMF) raised the 2009 growth outlook for
Korea to minus 1 percent from the previous projection of minus 1.8 percent. The revised
forecast, which was made as part of the fund’s global economic outlook for the second half
of 2009, is the third adjustment that has been made this year. The international organization
also lifted Korea’s 2010 growth forecast to 3.6 percent from the previous estimate of 2.5
percent. The Washington-based agency attributed the quicker-than-expected recovery of the
Asian region including Korea to expansionary policies, stabilization of the financial markets,
increased inflow of foreign capital and inventory adjustment.
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The Banking Act and the Financial Holding Companies Act were recently amended to
improve and supplement the existing system such as the reporting of changes in bank
ownership. The amendments are enacted on October 10, 2009 as planned after having been
passed through the Cabinet Meeting on October 6.
Under the revised act, a non-financial business operation (NFBO) must gain approval from
the Financial Services Commission (FSC) to become the largest shareholder of a bank or
participate in the management by acquiring more than 4 percent of bank shares. Moreover,
a stringent post-approval supervision including an eligibility assessment of the largest
shareholder will be in place to prevent any conflict of interest or illegal transaction.
The approval criteria are stipulated as follows: i) The bank’s credit line given to the largest
shareholder must not exceed the limit (bank’s total equity multiplied by the shareholder’s
proportion of bank’s equity) at the time of approval request; ii) the relevant firm or its non-
financial subsidiaries must have debt ratios below 200 percent and meet the regulatory
criteria; iii) when the firm is a financial institution, it must meet the financial soundness
criteria set by the financial regulation; iv) the bank shares must be purchased using the
firm’s own equity and not through leverage; v) the firm must not have insolvency
responsibilities in the last 5 years; and vi) the firm must have a will to improve structural
soundness of the financial institution and to contribute to the effectiveness of the financial
markets.
When a private equity fund (PEF), with more than 10 percent of its shares held by an NFBO as
a limited partner (LP), wishes to become the largest shareholder of a bank or participate in
its management by acquiring more than 4 percent of bank shares, the PEF’s general partner
(GP) is required to gain a pre-approval from the FSC. The FSC may request relevant
information on the PEF’s article of incorporation or the contract terms between the GP and
LP. This is to prevent the LP of NFBO from exercising influence on the GP, thereby controlling
the bank indirectly through the PEF.
The amended act exempts public pension funds from NFBO restrictions on the FSC’s
approval. The fund must be clear of any conflict of interest that may arise from holding both
bank shares and non-financial shares. Also, a non-financial company owned by a bank-
subsidiary PEF for buy-out purposes is exempt from NFBO status. This is to ensure that
banks are not unfairly regarded as a NFBO through their investment in a non-financial
company through a PEF.
Economic Bulletin 47
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The Miso Credit Foundation plans to open 20 to 30 branches starting December and expand
branches up to 300 nationwide through 2010, which will be operated mainly by volunteers or
bank retirees. About 200 to 250 thousand low-income households will benefit from the
program.
The target beneficiaries will include small business owners, business owners in traditional
outdoor markets, viable startup franchise store owners, regular startup businesses, startup
partnership businesses and endorsed non-profit organizations. The interest rates will be set
below the market rates and the individual loan can range from 5 to 100 million won with
maturity of 1 to 5 years.
Microcredit program
Viable startup franchise Facilitation of starting a new business for small - Up to 50 million won
store owners franchise store owners who are verified to be viable - Repayment in 5 years
Startup partnership Assistance of incorporation and operation costs for - Up to 100 million won
businesses self-supporting organizations - Repayment in 5 years
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Under the agreement, the five organizations will share all types of information provided by
financial companies unless prohibited by law. Accordingly, the level of information sharing
will be expanded from the current 60 percent of information owned by each institution to 98
percent. Information, which has been shared mainly in the form of banks’ regular report
before the agreement, will include regular or occasional reports by non-bank financial firms
and processed material. The financial authorities will heighten security to prevent
information leakage and establish mechanisms to prohibit exploitation of information for
investment purposes.
As for joint inspections, the FSS is required to embark on a joint audit of financial firms
within a month upon request from the BOK. Currently, before the request of joint inspection
from the BOK is officially announced the two institutions must hold working-level meetings.
The government decided to offer the same tax incentive given to other bonds to provide
more favorable conditions to the issuance of Sukuk in Korea. The tax breaks will first be
applied to two major Islamic bonds; Ijara Sukuk and Murabaha Sukuk. The revision is
expected to contribute to attracting Islamic fund, improving corporate financing conditions
by broadening sources of investment, and depending less on the US and Europe for
financing and diversifying risks.
Economic Bulletin 49
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Statistical
Appendices
Tables & Figures
1. National accounts
2. Production, shipment and inventory
3. Production capacity and operation ratio
4. Consumer goods sales index
5. Consumer goods shipment index and consumer sentiment index
6. Machinery orders received, domestic machinery shipment,
and estimated facility investment index
7. Value of construction completed and domestic construction orders received
8. Composite indices of business cycle indicators and BSI
9. Balance of payments (I)
10. Balance of payments (II)
11. Prices
12. Employment
13. Financial indicators
14. Monetary indicators
15. Exchange rates
Economic Bulletin 51
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1. National accounts
(year-on-year change, %, chained 2005 year prices)
P: Preliminary
Source: The Bank of Korea
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Economic Bulletin 53
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2. Production, shipment and inventory See graphs 6-1, 6-3, 7-1, 7-2 & 7-3
(constant prices, 2005 = 100)
Service
Production Shipment Inventory
Period Y-o-Y Y-o-Y Y-o-Y production Y-o-Y
index index index
change (%) change (%) change (%) index change (%)
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Economic Bulletin 55
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4. Consumer goods sales index See graphs 2-2, 2-3, 2-4 & 2-5
(constant prices, 2005 = 100)
Consumer
goods
Period Durable Semi-durable Non-durable
sales
Y-o-Y goods Y-o-Y goods Y-o-Y goods Y-o-Y
index
change (%) change (%) change (%) change (%)
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Domestic consumer
goods shipment index Consumer
Period (2005=100) Durable Non-durable sentiment index
Y-o-Y goods Y-o-Y goods Y-o-Y
change (%) change (%) change (%)
Economic Bulletin 57
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Economic Bulletin 59
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Cycle of
Leading Coincident
coincident
Period index Y-o-Y index BSI (results) BSI (prospects)
index
(2005=100) change (%) (2005=100)
(2005=100)
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9. Balance of payments (I) See graphs 5-1, 5-2, 5-3, 10-1 & 10-2
(million US$)
Economic Bulletin 61
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Producer prices
Consumer prices Export & import prices
(2005=100)
Period
All Items Commodity Service Core All items Commodity Export Import
Economic Bulletin 63
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2008 1 23,738 22,964 4,022 17,651 3.3 16,032 8,815 5,115 2,102
2 23,703 22,884 4,017 17,510 3.5 15,836 8,804 5,055 1,977
3 24,114 23,305 3,999 17,732 3.4 15,993 8,898 5,023 2,073
4 24,495 23,711 4,001 17,929 3.2 16,258 8,894 5,127 2,238
5 24,692 23,939 3,987 18,046 3.0 16,405 9,010 5,165 2,231
6 24,727 23,963 3,993 18,067 3.1 16,385 9,039 5,132 2,214
7 24,673 23,903 3,975 18,088 3.1 16,363 9,054 5,163 2,146
8 24,380 23,617 3,899 17,872 3.1 16,104 9,107 4,970 2,027
9 24,456 23,734 3,928 17,951 3.0 16,221 9,142 5,015 2,064
10 24,582 23,847 3,945 18,005 3.0 16,314 9,138 5,034 2,142
11 24,566 23,816 3,897 18,086 3.1 16,377 9,111 5,071 2,195
12 24,032 23,245 3,888 17,935 3.3 16,189 9,068 5,082 2,040
2009 1 23,709 22,861 3,895 17,663 3.6 16,053 9,102 4,982 1,969
2 23,667 22,742 3,842 17,539 3.9 15,953 9,194 4,862 1,897
3 24,062 23,110 3,813 17,701 4.0 16,076 9,174 4,941 1,961
4 24,456 23,524 3,846 17,899 3.8 16,353 9,227 5,051 2,076
5 24,658 23,720 3,846 18,016 3.8 16,484 9,316 5,076 2,092
6 24,927 23,967 3,836 18,251 3.9 16,736 9,340 5,281 2,115
7 24,756 23,828 3,802 18,210 3.7 16,589 9,383 5,255 1,952
8 24,525 23,620 3,761 18,048 3.7 16,479 9,472 5,117 1,890
9 24,630 23,805 3,810 18,155 3.4 16,687 9,606 5,151 1,931
Y-o-Y change (%)
2007 1.0 1.2 -1.0 2.2 - 2.7 5.1 0.6 -1.2
2008 0.5 0.6 -1.3 1.3 - 1.5 4.5 -1.8 -2.6
64 October 2009
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Economic Bulletin 65
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66 October 2009
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Economic Bulletin 67
EB(0910)_˙¥` 2009.10.19 8:21 PM ˘ ` 2 mac¤Ø
Editor-in-Chief
Park, Chul-Kyu (MOSF)
Editorial Board
Kim, Young-Min (MOSF)
Kim, Dong-Yule (KDI)
Lee, In-Sook (KDI)
Coordinators
Kim, Dae-Hyun (MOSF)
Cho, Hyun-Joo (KDI)
Editors
Lim, Keun-Hyuk (MOSF)
Kang, Ji-Eun (KDI)
Ministry of Labor
http://english.molab.go.kr/english