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External risks continue to threaten the global economy but Korea’s economic growth will likely improve in the second half of 2011 and free trade agreements are poised to increase expansion …

External risks continue to threaten the global economy but Korea’s economic growth will likely improve in the second half of 2011 and free trade agreements are poised to increase expansion substantially. Those were among the points made at the Korean Economic Forum, co-hosted by Samsung Economic Research Institute and the Korea JoongAng Daily at the Hotel Shilla on May 25. Among the many distinguished guests were ambassadors, CEOs and foreign correspondents.

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  • 1. Economic Outlook for Second Half 2011 May 25, 2011
  • 2. Table of Contents Economic Outlook for Second Half 2011 I. Current State of the Korean Economy II. Outlook for Second Half 2011 III. Implications 1
  • 3. 22
  • 4. Steady Recovery• Korea’s economy grew 6.2% in 2010, overcoming the global financial crisis• Recovery has continued into 2011 – Export and facilities investment increased 28.3% and 13.0% in 1Q 2011 – Manufacturing output grew 10.5% in 1Q 2011, and the average capacity utilization ratio was 83.2% Manufacturing Output and Avg. Capacity Utilization Ratio Major Indicators Manufacturing output Manufacturing avg.(year-on-year, %) 2010 (year-on-year, %) capacity utilization ratio 35 1Q 2011 (%) 30 86 29.9 30 28.3 25 83 25.0 20 25 15 80 20 10 77 15 13.0 5 74 0 10 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 6.2 -5 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 71 5 4.1 3.6 4.1 -10 68 -15 0 -20 65 Private Facilities Exports GDP consumption investment Source : Statistics Korea Source : Bank of Korea 3
  • 5. Steady Recovery of the US and Chinese Economy• US GDP growth: 3.1% • Chinese GDP growth: 9.8% (4Q 2010)  1.8% (1Q 2011) (4Q 2010)  9.7% (1Q 2011) – Second round of quantitative – Despite concerns of a slowdown easing and tax cut extension in domestic demand and economic growth caused by monetary easing US GDP Growth Rate China’s GDP Growth Rate (%) (%) 6.0 16 5.0 5.0 14.2 14 4.0 3.7 11.9 3.1 12 3.0 10.3 9.8 9.7 9.6 9.6 2.0 1.9 1.7 1.8 10 9.2 8 1.0 0.0 ‘09 0.0 6 2007 ‘08 1Q’ 10 2Q 3Q 4Q 1Q’ 11 4 -1.0 -2.0 2 -3.0 -2.6 0 2007 ‘08 ‘09 1Q ’10 2Q 3Q 4Q 1Q ‘11 Source : Bloomberg Source : Bloomberg 4
  • 6. Booming Exports and Improved Employment • Exports continued their uptrend • Private sector job creation improved in 2011 the overall job market – Exports in April hit a record-high – The number of employed in April US$49.15 billion, up 25.1% grew 379,000 year-on-year – Trade surplus was US$5.14 billion, the 15th consecutive monthly surplus Growth in Exports Growth in the Number of Employed(US$ 100 million) (month-on-month,%) (10,000) Growth in the number of employed 50 (left axis, q-o-q, seasonally adjusted) 22 Average daily exports (3- 40 month average, left axis) Growth in the number of employed 40 (left axis, y-o-y, seasonally unadjusted) Export growth (3-month 30 20 average, right axis) 30 20 18 20 10 16 10 0 14 0 -10 12 -20 -10 Source : Statistics Korea 10 -20 -30 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Jan. May Sept. Jan. May Sept. Jan. May Sept. Jan. ’08 ’08 ’08 ’09 ’09 ’09 ’10 ’10 ’10 ’11 ‘08 ‘09 ‘10 ‘11 Source : Kita.net 5
  • 7. Continued Uncertainties (‘Triple Whammy’)• A series of unfavorable events in 2011 – Unrest in the Middle East, the 2011 Tohoku Earthquake, and the EU fiscal crisis MENA Unrest Tohoku Earthquake EU Fiscal Crisis • Tunisia’s Jasmine • Catastrophic earthquake • Resurfacing fiscal crises Revolution and tsunami • A bailout for Portugal in • Ousting of President • Number of dead and April Hosni Mubarak missing : 28,000 • Scaling up of • Libya unrest • Nuclear crisis stabilization funds 6
  • 8. 77
  • 9. Economic Growth Rate : 4.3% (1H 3.7%  2H 4.7%)• Due to disruptive global events, the first half will see 1.1% growth (compared to 2H 2010) – Growth is forecast to reach trough in 2Q• 1.5% growth is likely in the 2H as uncertainties subside – In 4Q, year-on-year growth is expected to rise to 5.3% Source : Statistics Korea Index of Macroeconomic Indicators Index of Leading Macroeconomic Indicators Index of Coincident (year-on-year) Macroeconomic Indicators (net of trend) (%) 106 14 104 12 102 10 100 8 6 98 4 96 2 94 0 92 -2 90 -4 88 -6 Jan. 2008 May Sept. Jan.2009 May Sept. Jan. 2010 May Sept. Jan. 2011 8
  • 10. Private Consumption: 3.7% (1H 3.6%  2H 3.9%)• Private consumption will increase 3.7% in 2011 – Improving job conditions and wages will drive the increase• Spending growth compared with the previous half-year: 1.0%(1H) 1.1%(2H) – Consumer sentiment weakened in 1H due to inflationary pressure Consumer Prices & Consumer Sentiment Consumer Price Consumer Sentiment Index Change Rate 56 6.0 54 5.0 52 50 4.0 48 46 3.0 44 2.0 42 40 1.0 38 Source : Samsung Economic Research Institute, Statistics Korea 36 0.0 2006 2007 2008 2009 2010 2011 9
  • 11. Robust Facilities Investment, Sluggish Construction Investment • Facilities investment will increase • Construction investment will continue 8.2% in 2011 to be sluggish, falling 0.1% in 2011 – A 0.7% increase in the 1H over the – Less contribution by the public sector previous half-year: Large-scale and lackluster investment in the private facility expansion in 2010, Japanese sector earthquake, etc. – A 4.3% jump in 2H over 1H: External volatility decreases, while companies embark on investment Machinery Orders Construction Sector Indicators(Year-on-year, %) (Year-on-year, %) All industries combined 30 Complete amount80 Manufacturing 25 Construction60 20 work Civil work40 1520 10 0 5 0-20 -5-40 -10-60 Source : Statistics Korea Source : Statistics Korea -15-80 1Q. 2008 3Q 4Q 1Q 2009 3Q 4Q 1Q 2010 3Q 4Q 1Q 2011 1Q 2009 3Q 4Q 1Q 2010 2Q 3Q 4Q 1Q 2011 -20 10
  • 12. Exports: 17.2% (1H 22.5%  2H 12.4%) • Strong recovery continues until • Year-on-year growth is expected to 1Q (29.9%) slow after 2Q – Emerging economies maintained – A strong base effect will exert a growth as developed economies significant influence recovered – Daily average exports are expected to – Increased export unit prices and slightly decrease in 3Q and then turn export volume upward in 4Q Source : Korea International Trade Association Export Growth per Region Exports per Workday and Forecast(%, year-on-year) Developed economies (US$ 100 million) 20.5 20.6 41.4 Emerging economies 19.940 20 18.7 32.4 33.3 33.7 17.9 18 17.630 28.3 16.7 26.9 23.5 16 23.1 22.6 14.9 15.1 20.720 14 13.0 13.2 12 11.010 10 0 8 1Q 2010 2Q 3Q 4Q 1Q 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2(p)Q3(p)Q4(p) 2009 2010 2011 11 11
  • 13. Consumer Prices: 4.1% (1H 4.5%  2H 3.7%)• Consumer prices rose 4.5% in 1H • Inflation is forecast to slow to largely due to external supply shocks 3.7% in 2H – Oil prices surged due to the MENA – Slowdown in raw material price crisis, and crop prices increased due to growth, appreciation of the won, the abnormal climate and base effects – Fears of inflation grew while service – Raw material prices will remain prices and core inflation increased high while wages and service prices rise Global Raw Material and Crop Prices Growth of Consumer Prices in Korea IMF Commodity CRB Index (crops) Price Index (YoY, %) Core Inflation 600 210 Consumer Prices 6 190 Individual Service Prices 550 170 5 500 150 4 450 130 400 3 110 350 2 90 300 Source : Bloomberg 70 1 Source : Statistics Korea 250 50 0 Jan.‘09 Apr. Jul. Jan.‘10 Apr. Jul. 1Q ‘11 Oct. Jan. ‘11 2006 `07 `08 `09 `10 2011 12
  • 14. Won/Dollar Exchange Rate: 1,060 (1,095  1,025)• Factors for a stronger won will prevail – External factors: yen carry trade, US quantitative easing, yuan appreciation, etc. – Internal factors: current account surplus, less intervention in the foreign exchange market, undervaluation of the won, etc. – However, US rate hikes and capital controls may temporarily weaken the won and raise volatility Won/Dollar Exchange Rate Real Effective Exchange Rate (’09.3.2) (’10.4.26) (’10.12.21) (1993=100) Remains 180 Foreign Global financial1,600 Decreases Resumes decrease unchanged exchange crisis crisis Under 160 in Korea1,500 valuation of the1,400 140 won1,300 1201,200 100 Over1,100 valuation 80 of the1,000 won Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct. 60 2009 2010 2011 1990 ‘92 ‘94 ‘96 ‘98 2000 ‘02 ‘04 ‘06 ‘08 2010 Source : Bank of Korea, Samsung Economic Research Institute Source : Samsung Economic Research Institute 13 13
  • 15. 2011 Korean Economic Outlook (Year-on-Year, %) 2011 Unit 2010 Annual 1H 2H Average Economic Growth 3.7 4.7 % 6.2 4.3 (Half-on-Half) (1.1) (1.5) Private Consumption % 4.1 3.6 3.9 3.7 Facilities Investment % 25.0 9.3 7.2 8.2Construction Investment % -1.4 -3.4 2.9 -0.1 Consumer Prices % 2.9 4.5 3.7 4.1 Unemployment Rate % 3.7 3.8 3.4 3.6 US$100 Current Account 282 92 84 176 million US$100 Exports 4,664 2,711 2,756 5,467 million US$100 Imports 4,252 2,544 2,619 5,163 million Won/Dollar Won 1,156 1,095 1,025 1,060 Exchange Rate Corporate Bond Yield % 4.7 4.7 5.8 5.3 14
  • 16. 15
  • 17. Restoring Pre-Crisis Growth Will be Challenging• The Korean economy has escaped the crisis with favorable growth• However, a return to pre-crisis growth will be challenging – In 2011, real GDP will still be below potential GDP by about 4.7 trillion won – In 2008-2011, annual average growth stands at 3.6%, below the potential growth rate Real GDP vs. Potential GDP Real GDP Growth Potential GDP Growth Real GDP-Potential GDP (trillion won) (%) 12 30 10 20 8 10 6 4 0 2 -10 0 -20 -2 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011(p) -30 -4 -6 -40 -8 -50 Source : Bank of Korea, Samsung Economic Research Institute 16
  • 18. Government: Stimulus Measures Should be Gradually Normalized• Even though the Korean economy weathered the crisis, anxiety is rising over prices and fiscal soundness• The degree and timing of rate hikes must consider side effects – Rate hikes as well as inflation can stifle household consumption – Sudden rate hikes are risky considering household debt and insolvency of savings banks• The government should be growth-friendly when restoring fiscal soundness – The government’s fiscal role should continue to boost job creation and secure new growth engines 17
  • 19. Companies: Preparing for Future Uncertainties• Unfavorable business environment is expected even though companies successfully overcame the global financial crisis Japanese Making a successfulGlobal economic slowdown Companies turnaroundIncreased volatility in oil and Western Overhauling andcommodity prices companies investing Korean companiesContinued strengthening of Chinese Growing into globalthe won companies leading companies Strengthening Risk Response Systems & Up-front Investment for Future 18
  • 20. The Impact of the KORUS & Korea-EU FTAs and the Future of Korea May 25, 2011
  • 21. Contents The Impact of the KORUS & Korea-EU FTAs and the Future of Korea I. Introduction II. KORUS & Korea-EU FTAs II.1 KORUS FTA II.2 Korea-EU FTA III. Conclusions: The Future of Korea’s FTAs 20
  • 22. 21
  • 23. FTA Status Map of Korea EU Chile Singapore EFTA ASEAN India Effective from Effective Effective Effective Effective Effective July 2011 in 2004 in 2006 in 2006 in 2007 in 2010 Concluded Concluded Peru US Under Negotiation NewCanada Mexico GCC Australia Zealand Columbia Turkey 22
  • 24. Korea’ Economy May Recede Temporarily• Even though recovery from the financial crisis has been fast, Korea’s economic growth rate will be stagnant temporarily due to global economic set backs• It will be a significant challenge to return to the conditions prevailing before the crisis GDP drops due to the Crisis 12 (%) 10 Average GDP: 7.5% 1991~1997 8 6 Average GDP: 3.3% 2009~2011 4 Average GDP: 4.4% 2 1998~2008 Financial C Great R 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 -2 Source : BoK 23
  • 25. Korea’s FTA Strategy• Korea’s Standpoint on FTAs – World’s 15th largest economic power – Korea has achieved export-centered growth over the past 30 years – The global economy is already tied together by Regional Trade Agreements: Currently 294 are in force – Korea needs to utilize FTAs to further expand its exports, and timing is an important issue as FTAs are quickly spreading out all over the world• Characteristics of FTA Negotiations – Utilization of a representative country as a bridgehead to a continent or economic bloc • From Chile to S. America, From Singapore to ASEAN, From EFTA to the EU – Simultaneous negotiation of FTAs with both advanced and emerging economies – Comprehensive FTA deals covering services and investment 24
  • 26. 25
  • 27. KORUS FTACourse of the FTA process Korea Trade Minister’s Signing and Trade Ministers meeting at OECD Board meeting meeting at exchange of KTR Kim, Hyunjong visited the US Columbia, agreed FTA Special Committee in Korea’s Parliament Maryland, US documents 5.2 7.24 2.3 6.5 7 12 1.15 2 11.30 2.10 6th USA KORUS FTA• KORUS FTA Launching at Seoul 1st KORUS 7th Address at the US Capitol meeting in KORUS FTA in Building Washington• 90 days advance notice Washington D.C. D.C filed to the Congress. 120 5th KORUS FTA meeting days of pre-FTA in Big Sky, Montana discussions in the Senate’s Financial and House Budget Committee 26
  • 28. Agenda for the KORUS FTA• If the KORUS FTA is enacted, the following 5 years will be critical to Korea’s economy• US corporations may invest more actively and frequently in the Korean market In sum, Korea must utilize the KORUS FTA as an opportunity to boost its economic growth as well as to encourage and promote cooperation among small and medium size companies 27
  • 29. 10 Major Exports & Imports• The majority of export goods consist of chemical products and consumer goods• The majority of import goods consist of high-value added machinery and materials Export Share Import Share HSK Goods HSK Goods ($ mn) (%) ($ mn) (%) 1 8517 Telephone Sets 9,163 18.4 Machines for 1 8486 Semiconductor 3,274 8.1 2 8703 Motor Cars 6,615 13.3 Manufacturing 3 8708 Automotive Parts 3,910 7.8 Electronic Integrated 2 8542 2,980 7.4 Circuits 4 2710 Crude oil 3,460 6.9 3 8802 Aircraft 1,764 4.4 5 8473 Office Machinery Parts 2,439 4.9 4 1005 Corn 1,684 4.2 Electronic Integrated 5 7204 Steel 1,202 3.0 6 8542 1,291 2.6 Circuits Turbo-jets & Gas 6 8411 805 2.0 New Pneumatic Tires, of Turbines 7 4011 1,181 2.4 Refined Petroleum rubber 7 2707 779 1.9 Products 8 7306 Tubes, Pipes 948 1.9 8 8803 Aircraft Parts 750 1.9 Refrigeration and 9 8418 908 1.8 Measuring and Freezing Equipment 9 9031 600 1.5 Checking Instruments 10 8803 Aircraft & Parts 818 1.6 10 8479 Medical Devices 553 1.4Total 49,816 100 Total 40,403 100 28
  • 30. Impact of the KORUS FTA on Korea’s Economy Exports/ Tariff Reductions Trade Balance Imports • The increase in • Lower tariffs • Since 2000, Korea’s exports is lead to an Korea has had a expected increase in trade surplus to be much greater exports with the US than its imports amounting to • Manufacturing • Consumers will over $8 billion exports will increase have access to by $2.5 billion per import goods • Overall, lower US annum for a lower price tariffs will benefit Korea’s economy 29
  • 31. Economic Impact of the KORUS FTA on Korea’s Economy Productivity effect = 0 Dynamic model Positive productivity effect 7.75%  1.99% 6.99%  Short-term static 1.73%  Short-term static Short-term static 551,000  104,000  30
  • 32. Increase in Exports of Main Items Automobile Textiles Wireless Devices• Exports from Korea’s • Currently, Korea’s • Benefits are expected auto industry will exports of textiles to for the wireless device increase by $1.1 billion the US market are industry through the per annum over 15 years gradually declining even elimination of tariffs though the US textile• In particular, exports of market is still large • The Korean wireless auto parts will increase industry will increase its significantly • Since tariffs in the US competitive edge textile market are through exports to the• However, Japanese relatively high, the US vehicles manufactured in benefit from the the US will become more elimination of tariffs will competitive in the Korean be significant market 31
  • 33. 32
  • 34. Korea-EU FTA Session Date Location Details of the Negotiations Consists of four areas: Goods, services/investment, other (intellectual 1st 5/7-11/2007 Seoul property rights, government procurement, competition), settlement of disputes Discussion and planning of exchange for goods, service, and government 2nd 7/16-20/2007 Brussels procurement 3rd 9/17-20 2007 Brussels Commencement of initial offers 4th 10/15-19/2007 Seoul Consolidated agreements by each section and initial offer for goods Four issues major issues were discussed (initial offer for goods, 5th 11/19-23/2007 Brussels standardization for automotive technology, criteria for origination, open service market) 1/28-2.1 6th Seoul Advances in other issues but the four 2008Session Term Talk 3/2008 Paris Chief delegate meeting Agreement on settlement within the year. Pushed forward all but the major 7th 5/12-15/2008. Brussels issues 6/2008-3/ BrusselsSession Term Talk Trade minister meeting 2009 Seoul 8th 3/23-24/2009 Seoul Tentative agreement on criteria for origination and refund of tariffs Minister Meeting 4/2/2009 London Failure of the final agreement on the issue of refund of tariffs Summit Meeting 5/25/2009 Seoul Urge on finalization of the Korea-EU FTA by the summit meeting Minister Meeting 6/26/2009 Paris Arrival at conclusion regarding the remaining issues Summit Meeting 7/13/2009 Stockholm Declaration of settlement for the Korea-EU FTA 33
  • 35. Agenda for the Korea-EU FTA• The Korea-EU FTA will accelerate the ratification process for the KORUS FTA and will speed up FTA negotiations under consideration with China and Japan• Korea can benefit from coordinating with the EU in improving its industrial structure• Korea has to utilize the agreement effectively by attracting more foreign direct investment and generating jobs 34
  • 36. 10 Major Export & Import Goods• The majority of export goods consist of heavy chemical and consumer goods• The majority of import goods consist of machinery and materials Export Share Import Share HSK Goods HSK Goods ($ mn) (%) ($ mn) (%) 1 8901 Ships 11,765 21.9 Machines for Manufacture 1 8486 2,543 6.6 2 9013 Liquid Crystal Devices 4,897 9.1 of Semiconductors 3 8517 Line Telephony 3,682 6.9 2 8703 Cars 1,963 5.1 4 8703 Cars 3,311 6.2 3 3004 Medicament Mixtures 1,309 3.4 5 8708 Motor Vehicle Parts 2,948 5.5 4 8542 Integrated Circuits 1,024 2.6 5 8708 Motor Vehicle Parts 1,008 2.6 6 8529 Television parts 2,151 4.0 7 2710 Crude Oil 2,036 3.8 6 8479 Machines and Appliances 0,992 2.6 8 8905 Light Vessels 1,833 3.4 7 8414 Air Vacuum Pumps 0,731 1.9 Diodes/ Transistors & 8 8409 Parts for Motor Engines 0,672 1.7 9 8541 1,610 3.0 Semiconductor Devices 9 4202 Trunks, Suitcases 0,572 1.5 Computers & Office 10 8473 1,084 2.0 10 8481 Taps, Cock Valves 520 1.3 Machine PartsTotal 53,609 100 Total 38,721 100 35
  • 37. Impact of the Korea-EU FTA on Korea’s Economy• Increase in exports and imports, maintenance of a positive trade balance Exports/ Tariff Down Trade Balance Imports • The Korea-EU FTA • Due to tariff • Since 2004, will increase both elimination, the Korea had a imports and effects of trade surplus exports increased exports • Since tariff rates in from the EU will benefit both the Korea-EU FTA amounting to economies are higher than over $10 billion those in the in total KORUS FTA, the effects from the • Overall, lower US Korea-EU FTA will tariffs will benefit be greater than Korea’s economy from the KORUS FTA 36
  • 38. Economic Impact of the Korea-EU FTA on Korea’s Economy Productivity effect = 0 Dynamic model Positive productivity effect 5.62% 0.64% Short-term 3.84%  static 0.47%  Short-term static Short-term static 253,100  47,800  37
  • 39. Increase in Exports of Main Items Ships & Agricultural Automobiles Wireless Devices Products & Services• Korean car makers, who • No direct benefits are • Insignificant effects on have 4.5% of the EU expected for the agricultural products market, are expected to shipping and wireless and services receive the most benefits device industry through the elimination of tariffs • In spite of an increase• However, as Korean auto in exports of companies have a • However, Korean agricultural products, tendency to manufacture, industry has a Korea’s competitiveness locally, benefits might be competitive edge that is in this area is at a limited expected to increase standstill exports in the EU market • Some items for wireless devices may benefit from tariff elimination 38
  • 40. 39
  • 41. The Future of Korea’s FTA-generated trade• Korea is behind the world’s average in terms of trade covered by FTAs• Once Korea’s FTAs with the EU, US, and Peru come into effect, the share of Korea’s trade covered by FTAs will increase up to 35.1% Share of Trade covered by FTAs FTA Status of Korea (%) Under 90 In Effect Plus Concluded Plus Negotiation In effect Concluded negotiation 80 Australia 70 Chile EU Columbia 60 50 Singapore US Turkey 40 30 EFTA Peru New Zealand 20 ASEAN Canada 10 0 Mexico World Korea China Japan U.S. Germany U.K. GCC 40
  • 42. Long-term Vision: Strengthening Partnerships• The Doha Development Round has been stalled• Korea’s economic relations with American countries will be important in completing various international trade agreements TPP : Nine countries under negotiation including Chile and Peru ASEAN Korea APEC : negotiating on FTAAP 41
  • 43. Improving Korea’s Economic and Geopolitical Stability • Increase in psychological ties with each other • Strategic location • National security • Improved soft power economic security and extended smart power 42
  • 44. Revisiting Korea’s FTA Road Map to the Future GDP: $bn 43