Abstract: So everyone knows that all is not well with the US economy, and things are not looking too bright either in other parts of the world. We hear that the U.S. government is executing one of the biggest stimulus packages in history and other nations are following the same path. We also read that despite the falling asset prices, Warren Buffet has invested his billions in Goldman Sachs and GE and told people that this is an opportunity that comes once in a hundred years. Then what’s happening in South Korea, the world’s 11th biggest exporter? Are things better or worse? If it’s bad, what’s bad and how bad did it get? And is this truly the golden opportunity for investors to put their wealth in Korea?

As the world’s economic condition continues to worsen, South Korea’s economy is not exempt. In 2007, as the sub-prime mortgage disaster began to surface, many experts believed that the financial crisis would be limited to the U.S. and countries heavily intertwined with it, such as the U.K. When stocks plummeted in the Western world, the markets in the East stood relatively strong, tricking some into believing that China would emerge as the new financial leader and that Asia would remain unscathed by the crisis. Nonetheless, as the financial crisis became an economic one and non-financial sectors began to feel the weight of the crisis, no countries in the world could avoid this mess for long. South Korea, whose economy largely depends on exports to the U.S., saw sharp decreases in revenues. The effects were seen everywhere in Korea: KOSPI, the most renowned Korean stock exchange index, which had hit a record high of 2,000 mark by the end of 2007, hit rock bottom of 890’s just a year later, dropping by more than 50%. As the national dollar reserves decreased due to weak market sentiments around the world, won against dollar, which had traded around an approximate average of 900 won per dollar in 2007, sharply depreciated to a high of 1,500s, making the dollar about 1.6 times more expensive. (To give this statement more personal meaning, we can use the example of expenses for studying one year at Duke. What had cost about $43,000 for a Korean student became nearly $68,000. Not surprisingly, many students studying abroad in the U.S. are taking academic leaves or abandoning their studies and returning to their homeland).

The GDP forecast for Korea is not looking so bright either. In November, the Korean government had projected rather an optimistic 3% GDP growth for next year. Juliana Lee, Deutsche Bank senior economist of Global Market Research team specializing in forecasts for Korea and Malaysia, told me in October that she was looking at only 1% GDP growth if she looks at it optimistically, and that negative growth was possible if the Korean central bank, the Bank of Korea, does not lower interest rates and the Korean government does not address the falling housing prices. Nonetheless, the central bank lowered interest rates in December by 150 basis points, and President Lee Myung-bak’s administration has been striving to soften real estate regulations. Despite all these efforts, the market has been slow to respond and even the optimistic President has admitted recently that Korea could face even negative GDP growth next year.

Although the South Korean government is striving hard to minimize the damages by injecting its own wealth into private sectors, it has not been free of mistakes at a sensitive time when one mistake could prove fatal. For example, the well-meaning government announced in November that it is planning to launch a “Bond market stabilizing fund,” which would calm the troubling bond market by buying up toxic corporate bonds mainly issued by struggling construction and banking sectors. The market responded rather quickly, though in a negative way. The Korean Treasury bond yield shot up (which is the same as bond prices dropping sharply). Experts called the fund a complete failure. In a lunch conversation with Yong-Am Yoon, the Executive Director of the biggest Korean nonlife insurance company in Korea, Samsung Fire and Marine Insurance, I came to understand the foolish actions taken by the government. He said the idea of the fund was great, but the government officials had announced it too hastily without working out the details of its execution. After the announcement, the market roughly knew how much the government would inject and that the rest of the considerable amount would come from private banking and insurance sectors. But these sectors also had been facing liquidity problems. In order to finance this fund, these sectors would be likely to sell their Treasury bonds, assets that can most readily be converted into cash. Although the companies did not actually sell their Treasury bonds, the market expectation of their selling the bonds and causing an oversupply of bonds in the market quickly raised the bond yield and caused more turmoil in the market. After the yields had already rocketed to yearly highs, the government belatedly summoned the executives to provide the details. Director Yoon and other executives could only give cold looks to the government officials, who had made acquiring cash even more difficult for them by decreasing bond prices.

On the bright side, President-elect Barack Obama has promised more investment in Korea and President Lee has promised to carry out a stimulus package of $28.5 billion for new power plants. The national dollar currency reserve is stabilizing again, making the Won stronger. However, right now is certainly not the best time to invest. The economy does not seem likely to rebound any time soon, and it could get even worse, as Marc Faber of GloomBoomDoom.com, a famous contrarian, warned in an interview with Bloomberg late November. Faber predicted that the US stock market will implode in January or March. While people like Buffet, who can afford the opportunity cost, are investing and waiting on their long-term dividends and returns, the average Joe, who cannot afford to wait multiple years until stocks and housing prices rebound, would be better off not hoarding assets in Korea, the U.S., or in any part of the world right now.

Readers' Comments