QUARTERLY ECONOMIC REVIEW,
MARCH 1999


 

 Current Economic and Financial Movements
 

   Summary
 

    The Korean economy continued in recession in the fourth quarter of 1998, posting negative GDP growth, mainly led downward by the contraction of domestic demand. However, the decline was less steep than the previous quarter's. The current account maintained its surplus position in both the fourth quarter of 1998 and for January 1999, but the scale of the surplus was in decline. Prices stayed within a stable range for the first two months of 1999.

    GDP registered a negative growth rate of 5.3 per cent during the fourth quarter of 1998. However, the decline was less steep than the -7.1 per cent of the previous quarter, thanks to a modest easing of the sluggishness of domestic demand and the steady expansion of export volumes. For 1998 as a whole, GDP growth registered -5.8 per cent.

    Exports on a customs-clearance basis, which had fallen by 5.5 per cent in the fourth quarter of 1998, rose 3.1 per cent year-on-year in January 1999, reflecting the fewer days worked in the base month of the previous year in which the traditional Lunar New Year had fallen. The pace of the contraction in imports in the fourth quarter of 1998 slowed sharply from that in the first three quarters, this development being particularly marked for capital goods. For the first month of 1999, in contrast, imports rose 15.3 per cent influenced by the partial recovery of business activity and the seasonality effects associated with the Lunar New Year, as was the case for exports.

    The current account registered a surplus of 8.7 billion U.S. dollars in the fourth quarter of 1998. For January 1999, the size of the monthly surplus dropped back to 1.9 billion U.S. dollars, because of the sharp reduction in the surplus on the goods account.

    Consumer prices during the fourth quarter of 1998 shifted to a downward movement, falling by 0.2 per cent from their level in the last month of the previous quarter. This pace was maintained into January 1999 when they declined by 0.1 per cent from their December level. In February, however, consumer prices rose 0.4 per cent over the previous month reflecting the seasonal increase in demand for agricultural and marine products. Producer prices continued their downward trend from the second quarter of 1998, dropping by 0.7 per cent during the fourth quarter, and by 1.1 per cent and 0.2 per cent over the previous month in January and February, respectively.

    The growth rate of M3 in the fourth quarter of 1998, a barometer of overall liquidity, declined to 13.0 per cent on a daily average basis, from the 13.7 per cent of the previous quarter. Bank loans, including trust account loans, were down by 7.6 trillion won during the fourth quarter. This was because banks were still reluctant to lend, and their lending behaviour appears to have been considerably affected by seasonal and technical factors in December. Market interest rates eased overall during the fourth quarter as the Bank of Korea steadily brought down its market intervention rate. The call market rate posted 6.5 per cent at the end of 1998, and declined further to 6.0 per cent at the end of January 1999. Yields on three-year corporate bonds dropped to their lowest post-crisis level of 7.2 per cent in the middle of January, after registering 8.0 per cent at the end of 1998. But they turned back up to 8 per cent at the end of that month in tandem with growing anticipations of economic recovery and concerns over the ramifications of the Brazilian financial crisis.

 

  Economic Movements

Economic Growth

    During the fourth quarter of 1998, GDP registered a negative growth rate of -5.3 per cent, a decline less steep than the -7.1 per cent of the previous quarter. This was due to a modest easing of the sluggishness of domestic demand and the robust growth of exports.

    Looking at the quarter's growth by component of expenditure, final consumption expenditures continued to show a decreasing trend, although their rate of decline was lower than that of the previous quarter. Private consumption fell by 6.9 per cent, pulled down by wage reductions, asset-price deflation and the weak state of consumer confidence. Viewing spending by type, that on durables, centering on passenger cars and household electric appliances, decreased by a large margin and that on semi-durables, such as apparel and footwear, books, and home appliances, also continued to decline sharply. In addition, that on non-durables, such as food and beverages, and medicines, also fell but to a lesser extent. However, spending on services showed a mildly positive growth rate, boosted by an increase in that on telecommunication services and financial services. Government consumption registered a negative growth rate of -0.6 per cent, the slight decline being due to fiscal retrenchment in the general account budget following government restructuring.

    Fixed investment decreased by 17.9 per cent, a lower rate of decline than the -39.3 per cent in the previous quarter. In the process of restructuring, equipment investment shrank by 27.4 per cent. For its part, machinery investment shrank due to the sharp contraction of investment in most forms of machinery other than mobile telephone network facilities. Transportation equipment investment fell owing to the continuing marked decline of investment in all types of motor vehicles, including passenger cars, buses, and trucks, which offset by a large margin the brisk investments in shipping and railroad passenger and freight cars. Construction investment shrank 13.7 per cent, dragged down by particularly sharp decreases in both residential and non-residential building construction investment amid the contraction of real estate business and the collapse of business confidence, and by cutbacks in infrastructure investment projects such as port facilities and civil engineering.

    Exports, in real terms, maintained a robust growth rate of 8.8 per cent, broadly similar to the 8.0 per cent of the previous quarter. This dynamism was mainly delivered by exports of goods, thanks to brisk export performance in chemical products, iron and steel products, semiconductor, and clothing.

    Meanwhile, exports of services fell back somewhat, reflecting the decrease in transportation and telecommunication services, which offset the effects of the increase in foreign tourists' spending.

    Imports, in real terms, decreased by 9.0 per cent year-on-year. This much slower pace of decline than the -25.9 per cent in the previous quarter reflected the first stirrings of recovery in business and consumer confidence, along with the effect of their low level in absolute terms in the base period of the previous year. Imports of goods shrank due to the sharp drop in imports of consumer items such as food products and beverages, tobacco, textiles and leather, together with a decline in those of most capital goods and raw materials except semiconductors and non-ferrous metals. However, imports of services shifted to highly positive growth from their decline in the preceding quarter. They were boosted by an increase in fee payments of trade-related fees, which outweighed the decline in payments for overseas travel expenses.

  Growth Rates by Component of Expenditure 1)

Unit : per cent          


1997

1998 p)

year

G D P

5.0

-3.6

-7.2

-7.1

-5.3

-5.8

G N I

2.1

-6.8

-9.7

-8.6

-6.6

-7.9

Final consumption expenditure

3.2

-8.4

-9.7

-8.9

-5.8

-8.2

   Private consumption

3.5

-9.9

-11.2

-10.4.

-6.9

-9.6

   Government consumption

1.5

1.3

-0.7

-0.6

-0.4

-0.1

Gross fixed capital formation

-2.2

-20.6

-23.7

-22.2

-17.9

-21.1

   Equipment

-8.7

-38.3

-46.1

-39.3

-27.4

-38.5

   Construction

2.3

-5.9

-7.8

-12.0

-13.7

-10.2

Exports of goods and services

21.4

25.7

13.2

8.0

8.8

13.3

Imports of goods and services

3.2

-27.2

-25.5

-25.9

-9.0

-22.0

    Viewing economic growth by sector of economic activity, almost all sectors continued to show negative growth. While farming and construction both registered larger declines than in the previous quarter, in other sectors, including manufacturing, the rate of decrease moderated somewhat compared to the previous quarter.

    Manufacturing fell by 4.7 per cent, but its deceleration slowed markedly. Within manufacturing, light industrial production continued to decline, reflecting the contraction of consumption in almost all subsectors including leather, rubber, clothing, and footwear. Heavy industrial and chemical production slowed its pace of decrease compared with the previous quarter. Electrics and electronics, ships, and chemicals all showed good performance. However, non-metal ores, steel, and machinery all continued their sharply decreasing trends.

    The construction industry shrank by 13.3 per cent, due to the subdued state of both private and government construction. In the private sector, the construction of housing, factories and offices was sluggish, while that of expressways and railroads was brisk. Government construction dulled owing to the slowing of building construction and of civil engineering projects including ports.

    The service sector decreased by 3.4 per cent. In spite of increasing numbers of foreign visitors, the wholesale and retail trade, restaurants and hotels sector contracted due to the slackening of household consumption and external trade. Finance and insurance prospered due to the stock market recovery but business services continued their decreasing trend, affected by the massive contraction of both advertising and the leasing of machinery and equipment. Transportation was lackluster as a result of the decreases in the quantity of goods and number of passengers carried. Storage too was dull, reflecting the decline in the warehousing of industrial products and cold-store goods. Communications, though, were buoyant, thanks to the continued expansion of mobile telecommunications and especially personal communication services(PCS)

    The electricity, gas and water sector contracted 2.4 per cent due mainly to water-conservation efforts and decreased demand for electricity for industrial use.

    Agriculture, forestry and fishing production fell a steep 9.0 per cent. because of flood damage in the preceding quarter and reduced numbers of cattle and pigs, with fishing catches also being poor.
 

  Growth Rates by Sector of Economic Activity 1)

Unit : per cent          


1997

1998 p)

Year

Agriculture, Forestry & Fishing

4.6

6.2

-3.5

-7.0

-9.0

-6.3

Mining & Manufacturing

6.5

-4.8

-10.5

-9.3

-4.9

-7.4

    (Manufacturing)

6.6

-4.6

-10.4

-9.1

-4.7

-7.2

Electricity, Gas & Water

11.5

4.5

0.3

-4.1

-2.4

-0.5

Construction

1.4

-3.9

-6.6

-10.1

-13.3

-9.0

Services

5.4

-4.5

-7.4

-6.2

-3.4

-5.4

Government & Private Non-Profit
Services

1.9

1.2

0.4

-0.6

-0.1

0.2

Employment and Wages
 

    During the fourth quarter, the employment situation continued to be serious. The total number of persons in employment fell by 5.8 per cent. This represented a much larger decline than that of the economically active population, which decreased by 0.9 per cent. The number of persons unemployed, therefore, rose 2.8 times over the same period of the previous year, bringing the total to 1 million 586 thousand persons. This meant the fourth quarter's unemployment rate stood at 7.4 per cent, the same level as in the previous quarter.
 

Employment Trends  1)

Unit : thousand persons, per cent          


1997

1998

Year

Year

Economically active

132

416

-220

-205

-235

-199

-214

   population 1)

(0.6)

(2.0)

(-1.0)

(-0.9)

(-1.1)

(-0.9)

(-1.0)

Total number of persons

10

284

-756

-1,141

-1,365

-1,224

-1,122

in employment 1)

(0.0)

(1.4)

(-3.7)

(-5.4)

(-6.4)

(-5.8)

(-5.3)

   (Manufacturing)

-218

-203

-473

-647

-659

-584

-590


(-4.7)

(-4.3)

(-10.4)

(-14.4)

(-14.9)

(-13.2)

(-13.3)

   (Construction)

-20

36

-190

-444

-538

-533

-427


(-1.0)

(1.8)

(-10.2)

(-21.5)

(-26.0)

(-26.4)

(-21.3)

   (Wholesale, retail,

86

170

-204

-218

-267

-249

-233

   restaurants, and hotels)

(1.5)

(3.0)

(-3.5)

(-3.8)

(-4.6)

(-4.3)

(-4.0)

   (Agriculture, forestry,

-137

-81

103

214

84

-1

100

   and fishing)

(-5.7)

(-3.4)

(5.3)

(8.4)

(3.3)

(-0.0)

(4.3)

   (Business, personal, and

215

284

1

-31

41

185

50

   community services)

(5.1)

(6.9)

(0.0)

(-0.7)

(0.9)

(4.1)

(1.1)

Unemployment 2)

561

556

1,182

1,485

1,600

1,586

1,463


<122>

<131>

<537>

<935>

<1,130>

<1,025>

<907>

Unemployment rate

2.6

2.6

5.7

6.9

7.4

7.4

6.8

   (Seasonally adjusted)

2.8

2.6

4.7

6.9

8.4

8.1

6.8

    Viewing the pattern of employment by industry during the fourth quarter, most industrial sectors except business, personal and community services registered negative employment growth rate. Employment in construction and manufacturing decreased sharply, falling by 26.4 per cent and 13.2 per cent, respectively, in response to the severity of the downturn in these fields; and that of the wholesale, retail, restaurants, and hotels sector shrank by 4.6 per cent. In the agriculture, forestry, and fishing sector, the employment growth rate turned mildly negative. In contrast, employment in the business, personal and community service activities sector increased by 4.1 per cent, thanks to the launch of public works on a large scale.

    For the fourth quarter, nominal wages across all industries fell by only 0.4 per cent over the same period of the previous year, a much smaller decline than that of 8.1 per cent in the third quarter. By sector, nominal wages in the manufacturing and the wholesale, retail, restaurants, and hotels sectors, in both of which they had seen a massive year-on-year decline in the previous quarter, shifted to an upward trend, and those in construction and the financial intermediation, insurance, real estate, and business activities sector decreased less than in the previous quarter. However, there was a further acceleration of the pace of the decline in nominal wages in the transport, storage and communications sector.

Rates of Increase 1) of Nominal Wages by Industry

Unit : per cent          


1997

1998

Year

Year

All industries

0.9

7.0

0.1

-1.2

-8.1

-0.4

-2.5

   (Manufacturing)

-2.9

5.2

-2.6

-3.9

-10.1

4.8

-3.1

   (Construction)

3.8

8.2

-2.7

-6.2

-12.8

-8.0

-7.5

   (Transport, storage,     communications)

7.9

11.0

5.9

-2.5

-7.3

-8.8

-3.4

   (Financial intermediation,     insurance, real estate,
    and business activities)

0.0

5.1

-0.9

6.0

-10.1

-5.4

-4.1

   (Wholesale, retail,     restaurants, and hotels)

-0.6

8.6

-0.4

-0.9

-8.1

1.7

-2.1

 

External Transactions
 

    During the fourth quarter, exports fell by 5.5 per cent on a year-on-year basis, maintaining their poor performance evident since the second quarter. Exports for the year of 1998 as a whole accordingly decreased 2.8 per cent, their first negative growth for any full year since 1959.

    Seen by commodity group during the fourth quarter, exports of heavy industrial and chemical products declined 4.9 per cent compared with the same period of the previous year, due to a reduction in those of chemical products, iron & steel products, and general machinery, which counteracted the effects of increased semiconductor and automobile exports. Exports of light industrial products registered a negative growth rate of 3.5 per cent, because of the poor performance of textiles & clothing.

Rate of Increase 1) of Exports 2) by Sector and Destination

Unit : per cent          



1997

1998

1999

Year

Jan.

Year

Jan.

Exports

3.6

5.0

-0.4

8.4

-1.8

-10.8

-5.5

-2.8

3.4

Light industrial products

-3.6

3.5

-3.3

12.5

-7.9

-13.1

-3.5

-3.6

   Textiles & Clothing

3.0

3.3

-11.5

-5.0

-7.6

-7.4

-16.8

-9.3

      (Textiles)

1.4

3.1

-18.7

-11.0

-15.5

-15.3

-24.3

-16.6

      (Textile Yarn)

0.7

18.5

2.2

3.1

-13.6

-23.6

-24.3

-14.3

   Tires & Tubes

-8.1

-7.2

5.5

12.3

11.4

5.7

0.4

7.4

   Footwear

-41.9

-32.0

-41.1

-30.2

-27.1

-13.9

-5.9

-20.8

   Others

-9.5

7.7

8.9

37.7

-9.5

-22.0

16.8

3.4

      (Gold and Jewelry)

-13.3

16.0

41.1

83.7

-11.8

-33.6

35.5

10.6

Heavy industrial & Chemical products

5.6

4.3

-1.2

6.3

0.5

-9.3

-4.9

-2.2

   Chemical products

18.9

20.4

9.5

12.9

-1.1

-14.1

-8.9

-3.4

   Iron & steel products

21.4

18.9

-0.2

16.3

30.4

8.0

-5.2

11.7

   General machinery

0.4

8.5

-4.3

-1.9

-7.5

-19.0

-15.6

-11.3

   Electric & electronic    products

10.1

8.1

-1.4

9.8

-8.2

-11.5

1.3

-2.7

      (Semiconductors)

12.2

-2.4

2.2

12.7

-12.8

-11.7

5.1

-2.4

   Automobiles

-3.6

5.6

8.3

-5.7

-17.5

-11.1

3.6

7.7

   Ships

9.4

-8.5

42.9

47.6

51.6

6.6

4.7

22.9

   Others

-4.4

-14.6

-14.5

-2.7

3.7

-5.6

-16.0

-5.3

To industrial countries

10.3

4.8

14.9

23.4

3.6

-3.6

4.1

6.1

To developing countries

-1.3

5.1

-12.0

-2.9

-6.1

-16.5

-13.2

-9.9

     By destination, exports to the developed countries shifted to a positive growth rate, increasing 3.4 per cent, owing to the steady build-up of those to the U.S.A. & EU and a slowdown in the decrease of those to Japan. Meanwhile, exports to the developing countries decreased 13.2 per cent.

    In January 1999, exports rose 3.4 per cent year-on-year, reflecting the fewer days worked in the base month of the previous year in which the traditional lunar New Year had fallen.

    During the quarter under review, the pace of the contraction in imports slowed greatly compared with that in the first to third quarters, this development being particularly marked for capital goods. Even so, imports for 1998 as a whole fell by as much as 35.5 per cent. For the first month of 1999, in contrast, imports rose 15.3 per cent, influenced, as with exports, by the seasonality effects of the moving lunar New Year which had caused more days to be worked than in the base month of a year earlier.

Rate of Increase 1) of Imports 2) by Sector and Origin

Unit : per cent          



1997

1998

1999

Year

Jan.

Year

Jan.

Imports

-14.8

-3.8

-40.2

-36.2

-37.0

-39.9

-28.7

-35.5

15.3

  Consumer goods

-21.9

-7.9

-48.3

-41.5

-42.1

-46.2

-34.6

-41.3

  Raw materials

-6.8

2.3

-36.9

-35.2

-32.8

-38.5

-29.4

-34.0

    Crude oil

3.3

23.1

-25.3

-37.2

-29.8

-39.5

-39.6

-36.8

    Others

-9.9

-2.7

-41.0

-34.5

-33.5

-38.2

-25.9

-33.2

     (Iron & steel)

-4.3

-13.8

-26.5

-29.5

-48.3

-58.8

-57.1

-48.9

     (Petroleum&derivatives)

-30.3

-22.5

-33.0

-28.7

-26.1

-26.4

-37.5

-29.8

  Capital goods

-22.5

-10.4

-42.8

-36.0

-41.1

-39.9

-25.9

-35.9

    General machinery

-33.5

-21.3

-53.2

-50.2

-56.6

-55.0

-43.1

-51.6

    Electric&electronic     products

6.0

12.0

-29.2

-18.2

-23.9

-27.7

-14.0

-21.0

    Aircraft

-81.5

-40.2

-19.2

-51.7

-69.2

-47.8

39.1

-49.5

    Precision machinery

-17.1

-9.0

-41.4

-40.8

-36.1

-39.8

-20.5

-34.2

    Others

-52.7

-35.7

-71.6

-52.0

-44.2

-40.8

-47.5

-46.6

From industrial countries

-21.5

-9.4

-44.9

-36.9

-39.5

-40.7

-24.2

-35.7

From developing countries

-2.8

6.8

-33.5

-35.1

-32.2

-38.4

-35.1

-35.2

     The current account, in the fourth quarter, registered a surplus of 8.7 billion U.S. dollars, somewhat less than in the third quarter. This was attributable both to the narrowing of the goods surplus, owing to the slower deceleration of imports, and to the enlarged income deficit associated with increased outlays for interest payments.

    For January 1999, the size of the monthly surplus dropped back to 1.9 billion U.S. dollars because of the sharp reduction in the scale of the goods surplus.
 

Balance of Payments : Current Account

  Unit : billion U.S. dollars          


1997

1998

1999

Year

Jan.

Year

Jan.

Current Account

3.96

-8.17

3.07

10.83

10.91

9.62

8.69

40.04

1.91

   Goods

3.06

-3.18

2.11

9.70

11.30

10.35

9.81

41.16

1.87

   Services

0.68

-3.20

0.43

0.55

0.11

-0.14

-0.13

0.38

-0.04

   Income

-0.68

-2.45

-0.05

-0.71

-1.26

-1.11

-1.73

-4.81

-0.18

   Current transfers

0.90

0.67

0.58

1.29

0.76

0.52

0.74

3.30

0.26



    The Korean won firmed against the U.S. dollar in early January 1999, trading at the 1,149 won level per dollar, owing to the improved supply conditions in the Korean foreign exchange market brought about by the sustained current account surplus and inflow of foreign investment funds. However, it later depreciated under the effects of the Brazilian financial turmoil to move within the 1,170´1,180 won range. Since this February 18, the value of the won has fallen sharply against the dollar, reacting to the abrupt weakening of the Japanese yen. In consequence, the exchange rate stood at 1,223.0 won per dollar at the end of February, showing a 1.6% depreciation over its value at the end of December 1998.

    Meanwhile, against the Japanese yen, the Korean won showed an appreciating trend in January but weakened during February, reflecting the above described movements of the won/dollar rate and the movements of the yen/dollar rate in international financial markets. As at the end of February, the Korean won had risen 3.2 per cent against the yen since the end of the previous December.

Exchange Rate Trends of the Korean Won
(end of period)
 


1997

1998

1999

Dec.

Sep.

Oct.

Nov.

Dec.

Jan.

Feb.

U. S. dollar(/$) 1)

1,695.00 (-50.2)

1,391.00 (21.9)

1,319.00 (28.5)

1,246.00 (36.0)

1,204.00 (40.8)

1,175.00
( 2.5)

1,223.00 (-1.6)

Japanese yen(/100〕)

1,087.82 (-33.2)

1,023.93
( 6.2)

1,125.32 (-3.3)

1,009.05
( 7.8)

1,053.47
( 3.3)

1,009.97
( 4.3)

1,020.46
( 3.2)

Euro(/Euro) 2)

1,564.65 (-33.0)

1,616.59 (-3.2)

1,563.03
( 0.1)

1,428.76
( 9.5)

1,410.47
(10.9)

1,335.90
( 4.9)

1,347.70
( 4.0)

Prices

    Consumer prices, which had risen temporarily from August 1998 affected by unfavorable weather and increases in indirect tax rates, regained stability from November onwards as these one-off effects faded away. Accordingly, during the fourth quarter of 1998, they shifted to a downward trend, falling by 0.2 per cent from their level in the last month of the previous quarter. This trend was maintained into January 1999 when they declined by 0.1 per cent from their December level. In February, however, consumer prices again showed upward movements, registering a 0.4 per cent increase over the previous month mainly due to the seasonal increase in demand for agricultural and marine products. On a year-to-year basis, the rise worked out at only 0.2 per cent, reflecting the rapid rise in prices in the base month of the previous year shortly after the massive depreciation of the Korean won.

    Viewed by item, prices of agricultural and marine products during the fourth quarter of 1998 dropped by 0.7 per cent as against the end of the previous period. They were led downward by sharp decreases in fruit and vegetable prices amid dull demand and increased shipments with the harvest season at its height, and whose effects more than offset the rise in prices of marine products and livestock products which were in short supply. However, from early in the new year, the trend of agricultural and marine product prices shifted back to an upswing, rising by 1.3 per cent in January and 3.2 per cent in February. Their renewed rise centered on higher meat prices as supply shortages persisted and on fruit and vegetable prices, which were pushed up by the reduction in shipments following poor crops. They were further accelerated by the increased demand over S l, the lunar New Year's Holiday period. Together these influences combined to counteract the effect of lower prices for marine products due to the improved catches. Prices of industrial products during the fourth quarter increased by 0.6 per cent, mainly due to the working through of the government's earlier hike in taxes on fuel and to heavier seasonal demand for heating oil. Rise of petroleum products more than offset the effects of the continued downward pace of food and furniture and durables which reflected low consumer confidence, the stability of international raw material prices, and the steady firming of the Korean won. But, in January 1999, the prices of industrial products dropped by 0.4 per cent reflecting the decline in prices of petroleum products due to the rise in the exchange value of the won and lower international oil prices. In February, they held steady at the same level as prices of fuel and food products continued to ease but were balanced out by rises in those of publications, and of furniture and durables. Meanwhile charges for services during the fourth quarter dropped by 0.6 per cent over the last month of the previous quarter, and this trend was maintained into January and February, with declines of 0.2 per cent in both months. Their subdued tone reflected the steady decline in housing rents and charges for personal services, which offset the hikes in charges for several public services and utilities including train fares during the fourth quarter of 1998.

Rates of Increase of Consumer Prices 1) 

Unit : per cent          


1997

1998

1999

Year

Jan.

Feb.

Consumer prices

6.6
(4.5)

4.0
(9.0)

-0.6 (8.2)

0.8
(7.0)

-0.2
(6.0)

4.0
(7.5)

-0.1 (1.5)

0.4
(0.2)

   Agricultural and marine
   products

5.5

2.9

-1.9

7.5

-0.7

7.7

1.3

3.2

   Manufacturing industry
   products

8.8

4.7

-0.3

-0.6

0.6

4.3

-0.4

0.0

   Services

5.1

3.8

-0.3

-0.2

-0.6

2.6

-0.2

-0.2

    Producer prices maintained their downward trend from the second quarter of 1998, dropping by 0.7 per cent during the fourth quarter over the last month of the previous quarter, and by 1.1 per cent and 0.2 per cent over the previous month in January and February, respectively. Their rates of increase over the same month of the previous year registered -1.8 per cent in January and -4.3 per cent in February.

    Looking at producer prices by item, those of agricultural, forest and marine products during the fourth quarter of 1998 recorded a slight decline of 0.1 per cent compared to the end of the previous period, as prices of fruit and vegetable fell sharply in October due to the increased supplies, while those of livestock products and fresh fish rose from November onwards, affected respectively by the reduction in breeding herds and poor catches. At the beginning of the new year, they rose by 1.4 per cent in January, and by as much as 5.5 per cent in February in an upsurge, mainly attributable to the high prices of vegetable and fruit affected by supply shortages. Prices of manufactures during the fourth quarter of 1998 dropped by 0.7 per cent despite higher prices for wood and wood products in response to rising international timber prices. They were led downward by those of basic metal products amid falling international prices and dull domestic demand, and by the reversal to a decreasing trend of the prices of petroleum products from December onwards owing to the appreciation of the Korean won. In January 1999, their downward pace accelerated to post a decline of 1.4 per cent in response to further reductions in prices of petroleum products and basic metal products thanks to lower international raw material prices and the strengthened tone of the Korean won. A further contribution came from the decline in prices of chemical products due to the shrinking of demand. Producer prices of manufactured items sustained this downward trend in February, easing by 0.9 per cent, as prices for petrochemical products dropped with the fall in international prices, while basic metal products and general machinery and equipment prices dropped in response to the generally lower prices of imported inputs. Meanwhile charges for services fell by 1.1 per cent during the fourth quarter of 1998 owing to the decline in leasing charges and rentals, brought about by lower interest rates and won's appreciation. The downward trend evident since the second quarter of 1998 was sustained into the new year with declines of 0.8 per cent in January, centering on leasing rates and charges for legal, engineering and computer related services, and of 0.3 per cent in February, centering on transport charges.
  

 Rates of Increase of Producer Prices 1)

Unit : per cent          


1997

1998

1999

Year

Jan.

Feb.

Producer prices

9.6
(3.9)

6.6
(14.4)

-1.1
(13.9)

-1.2
(12.0)

-0.7 (8.6)

3.6
(12.2)

-1.1 (-1.8)

-0.2
(-4.3)

  Commodities

9.9

7.2

-1.2

-1.1

-0.5

4.2

-1.2

-0.2

    Agricultural, forest, and
    marine products

-1.5

5.8

-1.0

10.5

-0.1

15.7

1.4

5.5

    Manufacturing industry
    products

10.9

7.3

-1.3

-2.1

-0.7

3.0

-1.4

-0.9

    Electric power, water, and     gas supply

12.0

7.0

0.0

0.0

-0.7

6.2

0.3

0.0

  Services

8.8

4.8

-0.6

-1.4

-1.1

1.6

-0.8

-0.3

     During and after the fourth quarter of 1998, export and import prices maintained the downward trend which had become apparent in the second quarter of that year. Export prices dropped by 9.3 per cent in the fourth quarter, centering on petrochemicals and agricultural and marine products, and by 3.5 per cent in January 1999, affected by the appreciation of the Korean won and the slowdown in external demand. The trend was sustained through February, although their pace of decrease slowed to -1.6 per cent, as the appreciation of the Korean won moderated gradually. Import prices dropped by 8.1 per cent during the fourth quarter owing to the appreciation of the Korean won at that period and subdued demand throughout Asia. They maintained this downward trend into the new year, dropping by 3.3 per cent and 2.4 per cent in January and February, respectively.

Rates of Increase of Export and Import Prices 1) 

Unit : per cent          


1997

1998

1999

Year

Jan.

Feb.

Export prices

42.6

13.2

-14.5

-6.4

-9.3

-17.8

-3.5

-1.6

Import prices

35.3

10.6

-11.5

-4.9

-8.1

-14.5

-3.3

-2.4

    The downward trend of real estate prices from the fourth quarter of 1997 experienced a substantial moderation in the fourth quarter of 1998. Housing prices declined slightly in October and November in reflection of the uncertain prospects for the property market and seasonally reduced demand. However, in December, they showed an upward trend on the whole, which was especially pronounced for apartments in the Seoul area, as expectations of measures to boost the property market and of an overall improvement of economic conditions became more widespread. Meanwhile, nationwide land prices registered a decline of 0.2 per cent in the fourth quarter. Their pace of decrease slowed further, following its sharp deceleration in the previous quarter, owing to the easing of government curbs on the property market and policy initiatives to enliven the construction business.
 

Rates of Increase of Real Estate Prices 1)

Unit : per cent         


1997

1998 p)

Year

Housing prices

2.0

-4.7

-6.6

-0.8

-0.8

-12.4

   (Apartment in Seoul)

5.2

-7.2

-9.8

1.4

0.7

-14.6

Housing rents

0.8

-7.4

-11.3

0.3

-1.1

-18.4

   (Apartment in Seoul)

-1.5

-12.5

-18.8

10.0

-0.7

-22.4

Land prices

0.31

-1.27

-9.49

-3.12

-0.20

-13.60

 

   Money and Banking Movements
 

Money

    During the fourth quarter of 1998, the annual growth rate of M3, a barometer of overall liquidity, declined to 13.0 per cent on the basis of daily average figures, from the 13.7 per cent of the previous quarter. The growth of MCT(M2+ CDs+Money-in-trust) eased to 4.6 per cent from the 6.5 per cent of the previous quarter, due largely to the subdued trend of money-in-trust. It registered only 2.6 per cent in December, but moved back up to 3.6 per cent in January 1999 in view of the weakness of its rise in the base period of the previous year. The growth rate of M2, meanwhile, increased sharply from the 20.6 per cent of the previous quarter to 24.6 per cent, thanks to the increased taking of savings deposits by banks during the quarter. It accelerated further to 26.6 per cent in January 1999.
 

Monetary Aggregates1) and Market Interest Rate2) Trends

Unit : per cent          



1998

1999

p)

Oct.

Nov.

Dec. p)

Jan. p)

M3

14.2

13.7

13.0

13.5

13.1

12.4

-

MCT

8.6

6.5

4.6

6.1

5.2

2.6

3.6

M2

15.4

20.6

24.6

26.4

26.1

21.5

26.6

Reserve Money

-7.2

-9.5

-4.4

-0.9

-5.7

-6.6

-8.7

Call market rate3)

14.4

7.1

6.5

7.0

7.1

6.5

6.0

Yield on corporate bonds4)

16.0

11.9

8.0

10.0

9.3

8.0

8.1

 

Financial Markets
 

    Market interest rates eased overall during the fourth quarter as the Bank of Korea steadily brought down its market intervention rate. The call market rate fell from 7.1 per cent at the end of the third quarter, to 6.5 per cent at the end of the fourth quarter. It also continued to decline in the new year, easing to 6.0 per cent at the end of January 1999. Yields on three-year corporate bonds dropped from 11.9 per cent at the end of the third quarter to 8.0 per cent at the end of the fourth quarter. From the start of the new year, this downward trend continued and yields declined to 7.2 per cent, their lowest post-crisis level during January. But they rose back up to 8 per cent at the end of that month due to anticipation of economic recovery and concerns over the ramifications of the Brazilian financial crisis.

    Turning to deposits at financial institutions during the fourth quarter, those at deposit money banks increased by 8.2 trillion won. This was because the growth of saving deposits maintained a stronger pace, offsetting the reduced flow into short term marketable financial products such as CDs, RPs and cover bills. Deposits taken by banks' trust accounts shrank still further and they decreased 3.2 trillion won during the quarter, the pace of their contraction though decelerating from the considerable reduction of 17.6 trillion won during the previous quarter. Deposit-taking by investment trust companies showed a marked increase of 36.6 trillion won during the quarter following on from its buoyancy of the previous quarter(+44.4 trillion won), with funds being attracted by their comparatively high yields as market interest rates continued to fall. Deposits taken by merchant banking corporations sustained their expansion, rising by 4.0 trillion won during the fourth quarter following an increase of 3.4 trillion won during the previous quarter, evidencing a recovery of confidence in them now that their structural adjustment had considerably progressed.

    In January 1999, deposits at deposit money banks fell(-0.2 trillion won), mainly owing to the large decline in demand deposits. Deposits taken by banks' trust accounts also decreased(-4.3 trillion won) as the funds held in new type installment trust products were shifted at maturity into financial instruments which offered higher yields. Deposits taken by investment trust companies showed a considerable increase of 33.6 trillion won, as idle funds held both in financial institutions, including banks and merchant banking corporations, and in some companies were shifted to investment trust companies' beneficiary certificates which offered relatively high yields. Also, those taken by merchant banking corporations increased by 7.6 trillion won led by sales of their own paper.

    With respect to corporate fund raising, bank loans(including trust account loans) were down by 7.6 trillion won during the fourth quarter, following their fall of 5.4 trillion won in the third quarter. This was because banks were still reluctant to lend and their lending behaviour seemed to be considerably affected by seasonal and technical factors in December 1998. Meanwhile, during the fourth quarter of 1998, the issue of corporate bonds slowed its upward trend(+13.1 trillion won) as the share of large company issues fell after a system of ceilings on corporate bonds holdings came into effect(28th October). In the fourth quarter, CP issuance was down by 19.2 trillion won as the five largest chaebol focused on redeeming their loans after ceilings were imposed on the CP holdings of financial institutions(25th July). In January 1999, the downward trend of bank loans(including trust account loans) slowed substantially(-0.5 trillion won), and the monthly figure for corporate bond issuance increased slightly(+2.2 trillion won), more than in the preceding month, as the issue of corporate bonds increased, led mainly by companies other than five largest chaebol. In addition, CP issuance, which had contracted by as much as 16.4 trillion won during the last month of the previous year, expanded by 17.1 trillion won as companies actively issued new paper.

    Stock prices, during the fourth quarter of 1998, turned to an upward trend, as domestic and foreign investors bought shares on lower market interest rates and expectations of a coming economic recovery. Thus, KOSPI reached 579.9 on 15th December, its highest level that year, and it closed the year at 562.5. From the start of the new year, this upswing pace continued and KOSPI climbed to 641.1 by 11th January, spurred on by the upward adjustment of Korea's sovereign credit ratings. However, stock prices then turned to drift downward in a technical correction following their sharp increase and in reaction to international financial market instability characterized, for example, by the Brazilian financial crisis. Thus, KOSPI finished January at 571.4.
 

Financial Market Trends
(end of period)

Unit : billion won          


1998

1999

year

Jan. p)

Deposit money banks 1)

34,094

111,878

81,872

321,923

-1,590

Money-in-trust 2)

-88,923

-176,932

-32,029

-391,678

-42,752

Investment trust companies

101,228

444,003

366,383

1,095,734

336,203

Merchant banking corporations 3)

-32,858

40,237

29,510

-26,540

76,252

Bank loans 4)

-76,355

-54,303

-76,049

-146,926

-4,859

   Bank account loans 4)

-37,269

-9,126

-24,392

16,492

7,271

   Trust account loans 4) 5)

-39,086

-45,177

-51,657

-163,418

-12,130

Net bond issuance

1,461

141,319

131,554

327,011

22,347

Discount of CP 6)

74,735

92,518

-192,093

165,970

171,002

Composite Stock Price Index 7)

297.9

310.3

562.5

-

571.4


The Bank of Korea