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Web-only Exclusives November 30, 2000 From Our Correspondent: Hirohito and the War A conversation with biographer Herbert Bix From Our Correspondent: A Rough Road Ahead Bad news for the Philippines - and some others From Our Correspondent: Making Enemies Indonesia needs friends. So why is it picking fights? |
FEBRUARY 4, 2000 VOL. 26 NO. 4
'Stocks Are in Good Shape'
But Korea needs to push ahead with reforms
Based in South Korea the past three years, the investment veteran sees positive signs in a rebounding economy and historically low interest rates. He cautions, however, that the country's economy is still too risky and laden with too much debt photo: Seokyong Lee for Asiaweek |
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The crisis may be over, but not the repair and rebuilding work. The economy is undergoing structural re-balancing. There has been an export recovery, but we have to see whether it is sustainable. Inflation, declared at 1.5% for 1999, is down from anything experienced in Korea - a significant achievement. But inflation is still high relative to the U.S. Fixed capital investment also contracted. Private consumption has remained more or less at the same proportion of GDP in 1999 and the recovery was largely driven by net exports. Consumption needs to become the driver.
Where will growth come from?
Industries are evolving. There are structural issues - transparency, corporate governance and shareholder value creation - that remain to be solved. It is also unclear how Korea will handle the new Internet- and knowledge-based economy. The manufacturing sector, as a proportion of GDP, peaked in 1988 at 33%. The basic trend is for manufacturing to continue declining. Its place will be taken by the service sector, which has been the unsung hero in economic growth the past 10 years.
What about chaebol reform?
Though the chaebol are being dismantled, many are still powerful. Their cross-holdings are such that one unit of the conglomerate invests, say, 1 billion won in a second unit and the same money is invested by the second unit in a third unit, and so on. In most cases, one billion won of real money has created several billion won in paper equity. An investor does not realize that his money has gone out the back door into a company he does not know. This represents system risk because the chaebol are tied to all the banks they borrowed money from. Because of the interconnections in the financial market, that risk is huge. The massive web of system risk has not been untangled.
Wage pressures will grow this year. How will they impact the recovery?
Unemployment levels continue to fall, but there remains a massive labor pool to be deployed. We have seen some wage rises in 1999; continued upward pressure could be very destructive to Korea's recovery. Indeed, wage pressure is one of my biggest concerns for this year.
Has there been improvement in the Korean capital market and its structure?
The interest rate used to be 12%-15%, but it is now at single-digit levels. We expect Korea in a few years to move to a developed-market rate environment of 8%-9% for the corporate sector. The stock market has recovered, though its long-term growth is a function of big ifs. The companies are still over-leveraged. There are still different kinds of bubbles in the economy. Most capital in Korea is very short term and the issue is how to create investment capital that could go into three-, five- or ten-year bonds. An incentive should come from the restructuring of pensions, including funds.
There is also a lack of market forces. If Korea is to change that, it needs to aim for corporate profitability, wage growth in line with productivity growth, a competitive exchange rate and investment for value-added reasons. It should also stress new discipline in the capital market, untangle the chaebols' webs, reduce over-leveraged balance sheets, remove crippling regulations and minimize government interference. That cannot happen overnight. Government leadership is important as Korea moves toward the free-market economy espoused by President Kim Dae Jung. Overall, this economy is still too risky with too much debt. How will the stock market do this year?
It should be in good shape this year. The economy is going well, which will benefit producers. Hopefully, Korean companies have learned lessons and will continue de-leveraging, focusing on profits and creating value. If that happens, Korea would have a profits-driven stock market. The exuberance could mean the KOSPI index hitting 1,250. After a sag, it could go to 1,450. But it is good to remember the experience of late last year, when the KOSPI was driven by the top 10 or 20 companies, mostly telecom, electronics and finance stocks. Some have fallen back to earth. But SK Telecom is now trading at 4 million won a share, against just 1 million a few months ago. That was a massive change affecting the market capitalization. The stock is way overvalued, creating a distortion. On the other hand, solid stocks like Samsung Electronics have yet to demonstrate their true value.
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