SERI 2011 Korea Economic Forum 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.

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. 2
2

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. 7
7

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
amount
80 Manufacturing 25 Construction
60 20 work
Civil work
40 15
20 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 19.9
40 20
18.7
32.4 33.3 33.7 17.9
18 17.6
30 28.3 16.7
26.9
23.5 16
23.1 22.6 14.9 15.1
20.7
20 14
13.0 13.2
12 11.0
10
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 financial
1,600 Decreases Resumes decrease
unchanged exchange crisis crisis
Under 160 in Korea
1,500
valuation
of the
1,400 140
won
1,300 120
1,200 100
Over
1,100 valuation 80
of the
1,000 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 8.2
Construction 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 successful
Global economic slowdown Companies turnaround
Increased volatility in oil and Western Overhauling and
commodity prices companies investing
Korean
companies
Continued strengthening of Chinese Growing into global
the 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
New
Canada 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 FTA
Course 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 1.4
Total 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
2008
Session 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/ Brussels
Session 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 Parts
Total 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