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South Korean economy at crossroads

By Alyssa Kim for CNN

The South Korean stockmarket has been lackluster.
The South Korean stockmarket has been lackluster.

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(CNN) -- Depending on whom you listen to, the struggling South Korean economy is either poised for a rapid recovery or is destined to wallow in the financial doldrums for some time yet.

One of the region's better performers in recent years, Asia's fourth-largest economy has been hit by two quarters of negative growth as both foreign and domestic investment levels plunge.

While banking officials and economic analysts are predicting a stronger second half, the South Korean public are far from convinced with consumer confidence levels now at a record 58-month low.

This contrasts sharply with the optimism of the Governor of the Bank of Korea, Park Seung.

In an unprecedented recent announcement, Park predicted the economy could grow by 4 to 5 percent by the end of 2003 with the turnaround possibly starting as early as the third quarter.

The corporate sector is believed to have responded favorably to Park's prediction.

June figures released last Monday showed positive investment and production for year-on-year numbers. Exports of cars and computer chips showed their largest increase in four years.

And the confirmation of a second round of talks, possibly in September, aimed at addressing North Korea's nuclear program provided a short-lived boost for the stock market.

But Robert Subbaraman, economist at Lehman Brother's Tokyo branch, says it is still too early to predict whether the situation with North Korea is improving.

The situation there brought "uncertainty" in the first half and "most likely contributed to the weak investment in Korea, both domestic and foreign," he said.

"I think we have to see more concrete results before investors are willing to part with their money," Subbaraman said.

There has been a slew of bad news for consumers over recent months.
There has been a slew of bad news for consumers over recent months.

The drop in consumer spending is also a major drag on the economy.

"Consumer confidence is at an all-time low," said Tony Michell, managing director of Euro-Asian Business Consultancy.

"No one in the consumer sector believes the Governor of the Bank of Korea," he said.

"People are actually more gloomy than they were in November 1998 in the middle of the IMF crisis," he said.

Since October 2002 consumers have not had a high expectation of recovery.

This negativity coincides with the release of a credit card "black list" containing the names of about 2 million consumers. The list has grown 50 percent since to encompass around 12 percent of adult South Korean consumers.

The South Korean government and banks that once encouraged consumers to use their credit cards at first saw positive increases in private consumption and domestic production.

But the excessive use of plastic has now backfired, adding to the current woes.

Those on the black list have restricted access to their bank accounts, credit cards and cellular phones.

Despite this, figures released by the Bank of Korea show the level of outstanding debt held by households continues to rise.

In a bid to stimulate the economy, the central bank plans on currently keeping official interest rates at their all-time low.

The bank lowered interest rates to 3.75 percent the same week the country had slid into recession.

"They [the government] may cut it [the official rate] very slightly again," Michell said, "but I think the imbalance in the economy will make the government go slow in any further cuts."

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