QUARTERLY ECONOMIC REVIEW
JUNE 1999



Current Economic and Financial Movements


    
Summary

    The Korean economy, having shown signs of improvement from the last quarter of 1998 onwards, appeared to consolidate its recovery during the first quarter of 1999. GDP growth shifted from the deeply negative rate for last year as a whole into positive figures, while prices continued stable. There has also been a signal of improvement in employment situation since March. However, the scale of the current account surplus narrowed substantially.

    GDP grew at a rate of 4.6 per cent in the first quarter. This improvement was led by both an increase of domestic demand, notably private consumption and equipment investment, thanks to comparatively low interest rates and the easing of worries over the future economic situation. It was also supported by an acceleration of the upward trend of export volumes.

    The unemployment rate stood at 8.7 per cent in February, but has shown a downward trend since March, registering 7.2 per cent in April.

    The current account surplus during the first quarter of 1999 narrowed to 6.8 billion U.S. dollars from the 10.8 billion U.S. dollars of the same period of the previous year. This was because imports turned to an increasing trend that reflected the partial recovery of business activity, whereas exports shifted to a downward trend from February in value terms. The current account surplus continued to narrow during the April of 1999.

    Consumer prices, which had maintained a stable movement since March 1998, shifted to a mildly upward trend from early February due to rises in public utility charges and supply-demand imbalances for agricultural and marine products brought about by a combination of poor crops and seasonally increased demand. In May, however, consumer prices dropped by 0.2 per cent over the previous month, thanks to lower prices for agricultural and marine products, particularly vegetables, which were in plentiful supply. Producer prices, which had sustained a downward trend since the second quarter of 1998, rose slightly in April and May, mainly pushed up by higher international oil prices.

    The growth rate of M3, a barometer of overall liquidity since it includes deposits at non-bank financial institutions, stood at the 13.7 per cent, which was compatible with this year's target range(13∼14 per cent). Its growth was largely attributable to the expansion in supply on the part of investment trust companies by way of their purchases of CP, and the continuance of money supply through the government and foreign sectors. Looking at the movements of market interest rates, those at the short-term end maintained a downward trend, but long-term rates shifted to a slightly upward trend from the last ten days of April. The call market rate, meanwhile, dropped to the 4 per cent level. Yields on three-year corporate bonds maintained their downward trend during the first quarter, but they turned back up toward the end of April, due to anticipations of rising interest rates in tandem with the swiftness of the recovery in real business activities.

 

    Economic Movements

Economic Growth

    GDP grew at a rate of 4.6 per cent in the first quarter, mainly led by an increase of private consumption and equipment investment, and by the continuing brisk expansion of exports.

    Looking at the quarter's growth by component of expenditure, final consumption expenditures showed stable recovery movements. Household consumption has shown a conspicuous recovery during the quarter under review. This was influenced by lower interest rates, and the rebound of households' incomes, along with the easing of households' reluctance to spend followed on the soothing of anxieties over the future economic situation. Viewing spending by type, expenditure on big-ticket durables, such as passenger cars and personal computers, whose income elasticity is high, increased sharply. In addition, that on non-durables, centering on gasoline, rose and consumption of services, notably telecommunication services, also showed positive growth rates. Meanwhile, government consumption expenditure continued to show a decreasing trend due to the attrition of staff and fiscal retrenchment, particularly in relation to spending under the general account.

    As for investment expenditure, fixed investment fell, but its reduction was greatly moderated by the favorable showing of equipment investment. Inventory investment, however, maintained its sharply decreasing trend. Real expenditures on equipment turned upward, thanks to a limited return of business confidence in response to low interest rates and the easing of the credit crunch. Some of the apparent dynamism was, however, delivered by the effects of the low level of equipment investment in the base period of the previous year. For its part, machinery investment rose slightly, thanks to the sharp increase of investment in mobile telephones and computers, which are classed as advanced technology sectors. This largely offset the sluggishness of investment in construction and mining machinery and textile machinery. Investment in transportation equipment, centering on automobiles, ships, and railroad passenger and freight cars, also enjoyed a brisk performance. Construction investment, meanwhile, continued to show a decreasing trend. Infrastructure investment in the form of railroads, highways, and airports, witnessed a good performance, led by the early implementation of public works projects. However, building construction investment shrank sharply, dragged down by decreases in both residential and non-residential building construction investment amid the overall contraction of the real estate business.

    Exports of goods and services, in real terms, grew more rapidly. Exports of goods continued their upward movement, due to the robustness of heavy industrial and chemical products, centering on semiconductors, computers, and automobiles and offsetting the decrease in exports of light industrial products including leather and furs. Exports of services also turned in a favorable performance, boosted by an increase in trade-related income.

    Imports of goods and services, in real terms, shifted to highly positive growth affected by the recovery of domestic business activity. Imports of goods rose especially sharply, due to expanded imports of capital goods, such as computers and telecommunication facilities, together with an increase in those of consumer items, centering on food products and beverages, tobacco, and raw materials. Imports of services also registered a high growth rate, as payments of trade-related fees and overseas travel expenses increased.

 [Table 1]      Growth Rates by Component of Expenditure 1)

Unit : per cent           


1997

1998 p)

1999 p)

year

G D P

5.0

-3.6

-7.2

-7.1

-5.3

-5.8

4.6

G N I

2.1

-6.8

-9.7

-8.6

-6.6

-7.9

4.8

Final consumption expenditure

3.2

-8.4

-9.7

-8.9

-5.8

-8.2

5.0

   Private consumption

3.5

-9.9

-11.2

-10.4.

-6.9

-9.6

6.3

   Government consumption

1.5

1.3

-0.7

-0.6

-0.4

-0.1

-2.2

Gross fixed capital formation

-2.2

-20.6

-23.7

-22.2

-17.9

-21.1

-4.3

   Equipment

-8.7

-38.3

-46.1

-39.3

-27.4

-38.5

12.9

   Construction

2.3

-5.9

-7.8

-12.0

-13.7

-10.2

-13.7

Exports of goods and services

21.4

25.7

13.2

8.0

8.8

13.3

12.4

Imports of goods and services

3.2

-27.2

-25.5

-25.9

-9.0

-22.0

27.5

    Viewing economic growth by sector of economic activity, several industries including manufacturing, services and electricity, gas & water shifted back to positive growth, but others, including agriculture, forestry & fishing and construction, continued to post negative growth rates.

    Manufacturing shifted to strongly positive growth in the quarter under review, rising by 10.7 per cent. Backed by the sustained sound export growth and the recovery of domestic demand as well, it broke free from the negative growth in which it had been mired since the first quarter of 1998. Within manufacturing, semiconductors and computers continued brisk, and cars and ships showed a sparkling performance.

    The service sector increased by 6.6 per cent. The wholesale and retail trade, restaurants and hotels sector turned to an increase thanks to favorable external trade and the recovery of household consumption. Finance, insurance and real estate prospered due to the brisk stock market and more active land deals, registering positive growth overall. Transportation, too, got back on a positive growth track with an increase of goods carried reflecting the economic recovery. Communications were buoyant, thanks to the continued expansion of mobile telecommunications and VANs(Value Added Networks) as well. However, storage was dull, as a result of the decline in the warehousing of industrial products, cold-storage items, and agricultural goods.

    The electricity, gas and water sector grew 3.4 per cent due to increased sales of electricity for industrial use, expanded gas supply and increased demand for water on the part of households and firms.

    The construction industry shrank by 15.1 per cent, due to the remorseless decline in private construction. Government construction rebounded sharply, mainly thanks to the civil engineering projects, drainage and sewage works, and subway construction. But in the private sector, the constructions of housing, factories and offices remained sluggish, contrasting with the briskness of civil engineering projects including the private sector element in major infrastructure projects such as the high-speed railway and the West Coast Expressway.

    Agriculture, forestry and fishing production fell 7.6 per cent, due to reduced herds of cattle and pigs, despite heavy catches by deep-sea and inshore fishing.

[Table 2]   Growth Rates by Sector of Economic Activity1)

Unit : per cent         


1997

1998p)

1999p)

Year

Agriculture, Forestry & Fishing

4.6

6.2

-3.5

-7.0

-9.0

-6.3

-7.6

Mining & Manufacturing

6.5

-4.8

-10.5

-9.3

-4.9

-7.4

10.5

   (Manufacturing)

6.6

-4.6

-10.4

-9.1

-4.7

-7.2

10.7

Electricity, Gas & Water

11.5

4.5

0.3

-4.1

-2.4

-0.5

3.4

Construction

1.4

-3.9

-6.6

-10.1

-13.3

-9.0

-15.1

Services

5.4

-4.5

-7.4

-6.2

-3.4

-5.4

6.6

Government & Private
Non-Profit Services

1.9

1.2

0.4

-0.6

-0.1

0.2

-1.3


Employment and Wages


    The employment situation had been worsened by a reduction in job-openings and the downsizing of payrolls as firms battled to adjust themselves to the economic depression that followed the currency crisis. But the signs of improvement have become evident since March. The number of the unemployed and the unemployment rate both peaked in February. From then on there have been modest improvements in both figures, in April they stood at 1 million 550 thousand persons and 7.2 per cent respectively, the lowest levels since the November of the previous year. The main reason is that the total number of persons in employment increased more rapidly than the economically active population owing to the recovery of industrial activities and seasonal factors, even though the economically active population itself expanded from March onwards. The industries in which the number of persons in employment increased the most were agriculture, forestry, and fishing; construction.
 

[Table 3]  Employment Trends

Unit : million persons, per cent          


1998

1999

Year

Jan.

Feb.

Mar.

Apr.

Jan.∼
Apr.

Economically active
population
1)

20.9

21.7

21.6

21.4

21.4

20.7

20.6

21.1

21.6

21.0

 

(-1.0)

(-0.9)

(-1.1)

(-0.9)

(-1.0)

(0.1)

(-1.0)

(-0.6)

(0.0)

(-0.4)

Total number of persons in employment1)

19.7

20.2

20.0

19.8

19.9

18.9

18.8

19.4

20.0

19.3

 

(-3.7)

(-5.4)

(-6.4)

(-5.8)

(-5.3)

(-4.1)

(-3.8)

(-2.3)

(-0.6)

(-2.7)

  (Manufacturing)

4.1

3.8

3.8

3.9

3.9

3.8

3.8

3.9

3.9

3.8

  (Construction)

1.7

1.6

1.5

1.5

1.6

1.3

1.2

1.3

1.4

1.3

  (Wholesale, retail,
  restaurants, and hotels) 

5.6

5.6

5.5

5.6

5.6

5.6

5.6

5.6

5.6

5.6

  (Agriculture, forestry,  and   fishing)

2.1

2.7

2.6

2.3

2.4

1.7

1.7

2.0

2.4

1.9

  (Business, personal, and
  community services)

4.3

4.4

4.5

4.7

4.5

4.6

4.6

4.7

4.7

4.7

Unemployed persons2)

1.2

1.5

1.6

1.6

1.5

1.8

1.8

1.7

1.6

1.7

Unemployment rate

5.7

6.9

7.4

7.4

6.8

8.5

8.7

8.1

7.2

8.1

      Nominal wages across all industries, which had continued to decline since the second quarter of the previous year, shifted back to an increase in the first quarter with a rise of 5.6 per cent. By sector, the growth rate of nominal wages in the manufacturing sector was the highest due to the expansion of overtime payments. Nominal wages in transport, storage and communications; financial intermediation, insurance, real estate, and business activities sectors; and the construction sectors all shifted back an increase for the first quarter. But those in social and personal service activities sustained their downward trend of the preceding quarter and those in the wholesale, retail, restaurants, and hotels sectors turned to a decline.
 

[Table 4]  Rates of Increase1) of Nominal Wages by Industry

Unit : per cent        


1998

1999

Year

All industries

0.1

-1.2

-8.1

-0.4

-2.5

5.6

   Manufacturing

-2.6

-3.9

-10.1

4.8

-3.1

9.0

   Construction

-2.7

-6.2

-12.8

-8.0

-7.5

4.3

Transport, storage, communications

5.9

-2.5

-7.3

-8.8

-3.4

9.1

Electricity, gas & water

8.4

-3.7

2.0

-16.0

-2.7

-0.1

Financial intermediation,
insurance, real estate, and
business activities

-0.9

6.0

-10.1

-5.4

-4.1

7.1

Wholesale, retail, restaurants, and hotels

-0.4

-0.9

-8.1

1.7

-2.1

-0.4

Social & personal service
activities

1.5

4.4

-3.3

-3.3

-0.3

-5.2



External Transactions


      During the first quarter of 1999, exports fell by 5.9 per cent in value terms on a year-on-year basis, continuing their declining trend since the second quarter of the previous year. Stripping out the extraordinary item of the export of gold(2.2 billion U.S. dollars) gathered in the 'Gold Collection Movement' in the same period of the previous year, the growth rate of exports registered 1.0 per cent.

      Divided into each commodity group during the first quarter, exports of light industrial products declined by 19.9 per cent compared to the same period of the previous year, due to significantly reduced exports of textiles as well as the contraction of those of gold and jewelry from their unusually high level in the base period. Exports of heavy industrial & chemical products altered their course to register a positive growth rate of 3.6 per cent, led by semiconductors, information & communication equipment, machinery & precision instruments, and automobiles.

      By destination, exports to industrial and developing countries during the first quarter fell by 4.6 per cent and 7.1 per cent respectively. In April, overall exports registered a growth rate of -3.9 per cent, a decline less steep than that in the first quarter.

[Table 5]  Rates of Increase1) of Exports2) by Sector3) and Destination

Unit : per cent          


1998

1999

1998

Year

Apr.

Jan.∼
Apr.

Jan.∼
Apr.

Exports

8.4

-1.8

-10.8

-5.5

-2.8

-5.9

-3.9

-5.4

7.7

   Light industrial products

11.9

-7.9

-12.9

-3.8

-3.7

-19.9

-13.4

-18.3

8.6

      Textiles

-11.6

-16.4

-17.1

-26.9

-18.1

-16.4

-7.2

-13.8

-12.4

      Clothing

9.1

18.9

14.5

0.8

10.9

10.7

2.9

8.4

11.7

      Gold and jewelry

80.6

-12.0

-35.2

42.9

10.1

-51.4

-59.4

-52.9

63.3

   Heavy industrial & Chemical    products

6.3

0.6

-9.3

-4.8

-2.2

3.6

-0.7

2.4

7.3

      Semiconductors

12.7

-12.8

-11.7

5.1

-2.4

13.4

11.6

12.9

7.7

      Information &       communication equipment

-2.4

-8.2

-20.5

1.2

-7.6

29.8

43.5

33.4

-4.2

      Machinery & precision       instruments

5.0

4.7

-2.7

-9.3

-1.2

13.1

19.9

14.9

5.2

      Automobiles

-1.8

-13.9

-9.1

3.3

-5.4

8.0

5.5

7.1

0.1

      Metal goods

18.9

30.0

8.7

-7.5

11.8

-15.9

-26.6

-19.1

25.7

      Chemical products

11.5

-1.3

-12.8

-8.9

-3.4

-12.0

-11.4

-11.8

11.2

      Ships

47.6

51.5

6.6

4.7

22.9

1.8

1.0

1.5

47.1

   To industrial countries

23.4

3.6

-3.6

4.1

6.1

-4.6

2.1

-2.9

21.7

   To developing countries

-2.9

-6.1

-16.5

-13.2

-9.9

-7.1

-9.2

-7.7

-2.8

      During the first quarter, imports turned to an 8.1 per cent increase, reversing the negative growth trend since the third quarter of 1997. Broken down into types of product, imports of capital goods marked a positive growth rate of 20.0 per cent, led by electric & electronic products and precision instruments. Consumer goods imports rose 27.0 per cent, mostly by increased imports of consumer durables and direct consumption items. In contrast, imports of raw materials declined by 4.2 per cent. Grouped by origin, imports from industrial countries increased remarkably to register a positive growth rate of 13.1 per cent, but those from developing countries rose only slightly. In April, total imports increased at a rate of 10.7 per cent, accelerating their pace from the first quarter. This was due to the hike in international crude oil prices and sustained increase of capital goods imports.

[Table 6] Rates of Increase1) of Imports2) by Sector3) and Origin

Unit : per cent         


1998

1999

1998

Year

Apr.

Jan.∼
Apr.

Jan∼
Apr.

Imports

-36.2

-37.0

-39.9

-28.7

-35.5

8.1

10.7

8.8

-36.1

   Consumer goods

-46.6

-41.6

-47.6

-18.4

-39.5

27.0

-3.1

18.0

-44.7

   Raw materials

-33.4

-32.3

-37.7

-33.8

-34.3

-4.2

7.8

-1.3

-33.1

      Crude oil

-37.2

-29.8

-39.5

-39.6

-36.8

-20.7

7.3

-14.6

-36.1

      Iron & Steel products

-29.8

-44.1

-56.9

-55.3

-46.9

-0.8

0.1

-0.6

-31.4

      Chemical products

-29.4

-33.2

-33.7

-24.5

-30.3

4.1

5.9

4.5

-29.5

   Capital goods

-36.1

-40.5

-39.3

-25.3

-35.5

20.0

19.5

19.8

-36.9

      Machinery

-49.6

-56.8

-56.6

-45.8

-52.6

-3.1

3.8

-1.2

-49.7

      Precision instruments

-40.8

-35.6

-38.6

-19.8

-33.6

14.9

11.0

13.7

-38.7

      Electric & electronic
      machinery

-24.1

-28.3

-29.7

-15.9

-24.5

33.7

34.3

33.8

-25.1

      Aircraft

-51.7

-69.2

-47.8

39.1

-49.5

24.5

-53.2

-3.1

-62.2

From industrial countries

-36.9

-39.5

-40.7

-24.2

-35.7

13.1

4.7

10.8

-37.1

From developing countries

-35.1

-32.2

-38.4

-35.1

-35.2

0.9

21.1

5.7

-34.6

      The current account registered a surplus of 6.8 billion U.S. dollars in the first quarter, reduced from 8.7 billion U.S. dollars in the preceding quarter. By subaccount, the surplus on the goods account declined from the 9.8 billion U.S. dollars of the previous quarter to 7.1 billion U.S. dollars. The income account recorded a deficit of 0.8 billion U.S. dollars due to heavy interest payments. In April, the size of the current account surplus narrowed from 2.7 billion U.S. dollars in the previous month to 2.0 billion U.S. dollars. The decline reflected a reduction in the scale of the goods surplus and the enlarged income deficit associated with increased outlays for interest payments.

 

[Table 7] Balance of Payments: Current Account

Unit: billion U.S. dollars         


1998

1999

1998

Year

Apr.

Jan.∼
Apr.

Jan.∼
Apr.

Current Account

10.83

10.91

9.62

8.69

40.04

6.78

2.02

8.80

14.42

   Goods

9.70

11.30

10.35

9.81

41.16

7.11

2.75

9.86

13.49

   Services

0.55

0.11

-0.14

-0.13

0.38

-0.13

-0.12

-0.25

0.43

   Income

-0.71

-1.26

-1.11

-1.73

-4.81

-0.84

-0.74

-1.58

-1.09

   Current transfers

1.29

0.76

0.52

0.74

3.30

0.64

0.14

0.78

1.59




      The Korean won fell against the U.S. dollar in February and March, moving in sympathy with the weakening yen. But it strengthened again from mid-April under the effects of the abundant supply of foreign currency liquidity in the Korean foreign exchange market brought about by the sustained current account surplus and the inflow of foreign investment funds. In early May, the won depreciated for a short period as expectations of its further appreciation were dampened with an announcement on April 30 setting out measures such as the adjustment of demand and supply in the foreign exchange market.

      However, the Korean won resumed its appreciating trend from mid-May onwards due to the inflow of funds for the purchase of Korean corporate assets by foreign companies and renewed expectations of appreciation. In consequence, the exchange rate stood at 1,186.2 won per dollar at the end of May, showing a 1.5 per cent appreciation over its value at the end of last year.

      Meanwhile, against the Japanese yen, the Korean won appreciated sharply from late this April, reflecting the movements of the won/dollar rate described above and the weakening yen against the greenback in international financial markets. As of the end of May, the Korean won stood at 974.6 won per 100 yen, showing an appreciation of 8.1 per cent over its exchange value at the end of last year.

 

[Table 8] Exchange Rate Trends of the Korean Won1)
(End of period)
 


1998

1999

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May.

U.S. dollar(₩/$)2)

1,246.00 (36.0)

1,204.00 (40.8)

1,175.00
( 2.5)

1,223.00 (-1.6)

1,227.00 (-1.9)

1,188.00 ( 1.3)

1,186.20 ( 1.5)

Japanese yen(₩/100¥)

1,009.05
( 7.8)

1,053.47
( 3.3)

1,010.53
( 4.2)

1,027.66 ( 2.5)

1,015.93 ( 3.7)

985.67
( 6.9)

974.57
( 8.1)

Euro(₩/Euro)3)

1,428.76
( 9.5)

1,410.47 (10.9)

1,335.90
( 4.9)

1,347.70
( 4.0)

1,314.41
( 7.3)

1,249.34 (12.9)

1,239.27 (13.8)



Prices

      Consumer prices, which had declined slightly during the fourth quarter of 1998, shifted back to an upswing in the quarter under review. They rose by 0.5 per cent during the period from their level in the last month of the previous quarter owing to the seasonal imbalances in the supply of and demand for agricultural and marine products. They maintained their upward pace in April, rising by 0.3 per cent due to higher international oil prices. In May, however, consumer prices dropped by 0.2 per cent from their level in the previous month because of increased shipments of some agricultural products. They registered only a 0.8 per cent increase in May on a year-on-year basis.

      Viewed by item class on the basis of the end month of the previous period, prices of agricultural and marine products soared by 5.1 per cent during the first quarter of 1999. They were led upward by sharp increases in fruit prices affected by the reduction in shipments due to poor crops and increased demand over Sŏl, the Lunar New Year holiday period, whose effects more than offset the decrease in marine products prices thanks to improved catches. They continued on their upward course, rising by 0.8 per cent in April in response to the robust strength of the increase in fruit prices. But with increased shipments of vegetables, they shifted to a decline in May, falling by 1.5 per cent. Prices of industrial products during the first quarter of 1999 dropped by 0.5 per cent, centering on petroleum products and processed foods which were influenced by the stability of international raw material prices. In April and May, however, their prices rose by 0.4 per cent in each month. This was mainly a response to the sharp rise in fuel prices including those for kerosene, diesel, and gasoline, which were caused by the increase of international oil prices following an agreement to cut production among OPEC members. Meanwhile charges for services during the first quarter remained unchanged overall from the preceding quarter, thanks to the offsetting effect of the decline in housing rents and charges for personal services on the increased charges for public services and utilities including train fares, school fees, and water charges. Service charges proceeded to decline by 0.1 per cent in April, and 0.3 per cent in May. They were led downward both by lower prices for piped gas, reflecting the decline in prices of imported LNG and the rise in the exchange value of the won, and by the steady decrease in housing rents. The government's holding down of charges for public services and utilities also contributed to the downward stability in service charges.

[Table 9]  Rates of Increase of Consumer Prices1)

  Unit : per cent          


1998

1999

Year

Apr.

May

Consumer prices

4.0

-0.6

0.8

-0.2

4.0

0.5

0.3

-0.2

(9.0)

(8.2)

(7.0)

(6.0)

(7.5)

(0.7)

(0.4)

(0.8)

Agricultural and marine products

2.9

-1.9

7.5

-0.7

7.7

5.1

0.8

-1.5

Manufacturing industry products

4.7

-0.3

-0.6

0.6

4.3

-0.5

0.4

0.4

Services

3.8

-0.3

-0.2

-0.6

2.6

0.0

-0.1

-0.3

 
      Producer prices maintained their downward trend evident since the second quarter of the previous year, dropping by 1.4 per cent during the first quarter of 1999 over the last month of the previous quarter. The impact of higher international oil prices from early in the second quarter, however, caused them to rise by 0.3 per cent in April, and 0.4 per cent in May.

      Looking at producer prices by item on the basis of the end month of the previous period, those of agricultural, forest and marine products during the first quarter of 1999 rose by 7.0 per cent in a surge attributable to the higher prices of fruit and vegetable caused by shortfall of supply. In April, however, their rate of increase eased to 0.9 per cent because of a decline in vegetable prices which largely counteracted the continued rise of livestock and fruit prices. And in May, they turned downward, helped by increased arrivals of fruit and wet fish, registering -0.1 per cent. Prices of manufactures during the first quarter dropped by 2.5 per cent in response to the decrease in prices of petroleum products and basic metal products brought about by lower international raw material prices and the strengthened tone of the Korean won. A further contribution came from price reductions induced by weakness of demand for chemical products, and wood products. But the prices of manufactures rebounded somewhat to rise by 0.3 per cent in April and 0.6 per cent in May, as the effects of higher international prices for oil and raw materials generally from the beginning of the second quarter fed through to push up the prices for petroleum and chemical products. Meanwhile charges for services maintained their downward trend evident since the second quarter of 1998, with a fall of 0.1 per cent during the first quarter centering on leasing rates and transport charges. After marking time at the previous month's level in April, they turned mildly upward in May, led by a rise in advertising fees owing to the increased volume of publicity and promotional materials from the start of the second quarter.

[Table 10]  Rates of Increase of Producer Prices1)

  Unit : per cent          


1998

1999

Year

Apr.

May

Producer prices

6.6

-1.1

-1.2

-0.7

3.6

-1.4

0.3

0.4

(14.4)

(13.9)

(12.0)

(8.6)

(12.2)

(-3.5)

(-4.1)

(-2.6)

  Commodities

7.2

-1.2

-1.1

-0.5

4.2

-1.7

0.3

0.5

     Agricultural, forest,
     and marine products

5.8

-1.0

10.5

-0.1

15.7

7.0

0.9

-0.1

     Manufacturing
     industry products

7.3

-1.3

-2.1

-0.7

3.0

-2.5

0.3

0.6

     Electric power, water,
     and gas supply

7.0

0.0

0.0

-0.7

6.2

0.3

-1.1

0.2

  Services

4.8

-0.6

-1.4

-1.1

1.6

-1.0

0.0

0.3

      Export prices maintained their downward trend which had become apparent in the second quarter of the previous year, even though the pace of their decrease slowed. Looking at export prices by time period, they fell by 1.6 per cent in the first quarter centering on petrochemical products. In April a fall in export prices of basic metal products and those of TV, radio, and communication equipment more than offset the higher prices of petrochemical products induced by the rise of international oil prices, bringing about a 0.1 per cent reduction overall. Then in May, they dropped by 2.0 percent due to the fierce price competition among semi-conductor producers, sparked by excess supply. Import prices also declined by 2.5 per cent during the first quarter, centering on processed foods and basic metal products and maintaining the downward pace shown since the second quarter of the previous year. In April, however, they rose by 2.0 per cent because of the increased prices of crude oil and petroleum product imports following the rise in international oil prices. And in May they maintained the same level as in the previous month, since the decreased prices of intermediate raw materials and capital goods brought about by subdued global demand for them, served to counteract the sustained upward strength of higher prices for crude oil and petroleum products.
 

 [Table 11]  Rates of Increase of Export and Import Prices1)

Unit : per cent          


1998

1999

Year

Apr.

May

Export prices

13.2

-14.5

-6.4

-9.3

-17.8

-1.6

-0.1

-2.0

Import prices

10.6

-11.5

-4.9

-8.1

-14.5

-2.5

2.0

0.0

      Real estate prices had shown stirrings of recovery centering on some areas of the Greater Seoul region from the end of the previous year. These consolidated to produce an upward trend from early this year, fed by expectations of higher property prices and downwardly stable interest rates. During the first quarter, housing prices and housing rents increased by 1.8 per cent and 7.0 per cent, respectively, centering on apartments in Seoul. Their upward pace was sustained in April, despite the seasonally reduced demand, and they rose by 0.1 per cent and 1.4 per cent, respectively. Meanwhile, nationwide land prices, whose rate of decrease had moderated gradually during the latter half of the previous year, showed a mild upturn, rising by 0.4 per cent on the strength of the heightened activity in areas classed as quasi-agricultural and forest, greenbelt, and agricultural and forest.
 

[Table 12]  Rates of Increase of Real Estate Prices 1)

Unit : per cent           


1998

1999

Year

Apr.

Housing prices

-4.7

-6.6

-0.8

-0.8

-12.4

1.8

0.1

 (Apartments in Seoul)

-7.2

-9.8

1.4

0.7

-14.6

4.3

0.5

Housing rents

-7.4

-11.3

0.3

-1.1

-18.4

7.0

1.4

 (Apartments in Seoul)

-12.5

-18.8

10.0

-0.7

-22.4

15.4

2.1

Land prices

-1.3

-9.5

-3.1

-0.2

-13.6

0.4

      Monetary and Financial Developments

 

Money

      During the first quarter of 1999, the annual growth rate of M3, a barometer of overall liquidity, increased to 13.7 per cent on the basis of daily average figures, from the 13.0 per cent of the fourth quarter of 1998, thanks to the increased taking of deposits by investment trust companies during the quarter. The growth rate of MCT(M2+CDs+Money-in-trust) also increased to 4.9 per cent from the 4.6 per cent of the previous quarter, due largely to shifts of funds out of short term marketable financial products such as RPs and cover bills. It accelerated briskly to 7.0 per cent in April, owing to large inflows into newly-launched unit-type money-in-trust products. The growth rate of M2 accelerated sharply, rising from the 24.6 per cent of the previous quarter to 30.0 per cent, thanks to the heightened taking of savings deposits by banks during the quarter. It accelerated further in April 1999 to reach 34.5 per cent.

[Table 13] Monetary Aggregates1) and Market Interest Rate2) Trends

Unit : per cent          


1998

1999

year

Jan.

Feb.

Mar.

Apr.p)

M3

13.7

13.0

14.0

13.7

13.1

13.8

14.1

-

MCT

6.5

4.6

7.5

4.9

3.1

4.9

6.9

7.0

M2

20.6

24.6

19.0

30.0

26.3

29.9

33.7

34.5

Reserve money

-9.5

-4.4

-7.2

0.6

-8.7

4.4

7.2

10.9

Call market rate3)

7.1

6.5

6.5

4.9

6.0

5.0

4.9

4.8

Yield on corporate bonds4)

11.9

8.0

8.0

8.1

8.1

8.7

8.1

7.7

 

Financial Markets

      Market interest rates eased overall during the first quarter as the Bank of Korea steadily brought down its market intervention rate and there was ample market liquidity. The call market rate fell from 6.5 per cent at the end of the fourth quarter of 1998 to 4.9 per cent at the end of the first quarter. It continued its downward trend in April, easing to 4.8 per cent at the end of the month. Yields on three-year corporate bonds largely marked time, edging up only slightly from 8.0 per cent at the end of the fourth quarter of 1998 to 8.1 per cent at the end of the first quarter. They fell back again to 7.7 per cent at the end of April 1999.

      Reviewing deposits at financial institutions during the first quarter, those at deposit money banks increased by 14.5 trillion won. This was because the growth of savings deposits maintained a strong pace, offsetting the reduced flow of funds into short term marketable financial products. Savings deposits were attractive because of their comparatively high interest when yields of beneficiary certificate of investment trust companies were continuing to fall. Deposits taken by banks' trust accounts shrank still further during the quarter, decreasing 14.5 trillion won. Deposit-taking by investment trust companies showed a marked increase of 40.4 trillion won during the quarter under review, following on from its buoyancy of the previous quarter(+36.6 trillion won). This was because temporarily surplus funds held in financial institutions, including banks and merchant banking corporations, and in some companies were shifted into investment trust companies' beneficiary certificates. Deposits taken by merchant banking corporations saw their expansion reduced, rising by only some 0.9 trillion won during the first quarter. This was because sales of their own paper fell as the scale of their mutual transactions with investment trust companies was reduced.

      In April 1999, there was a large rise(+2.7 trillion won) in deposit-taking by deposit money banks, mainly owing to markedly increased flows into short term marketable products. The decreasing trend of deposits taken by banks' trust accounts eased(-0.9trillion won), as the inflow of funds into unit-type money-in-trust products gathered further strength. Deposits taken by investment trust companies showed a considerable expansion of 7.9 trillion won, with funds being increasingly attracted to equity-type beneficiary certificates as the rate paid by other financial institutions on deposits fell and the equity market flourished. Deposits taken by merchant banking corporations decreased by 0.9 trillion won during the month, influenced by the suspension of Daehan Merchant Banking Corporation.

      With respect to corporate fund raising during the quarter under review, bank loans(including trust account loans) rebounded during the first quarter from their downward trend since the second quarter of 1998 to reach 3.3 trillion won, reflecting banks' efforts to expand lending to small and medium enterprises. Meanwhile, during the first quarter of 1999, new issues of corporate bonds slowed their upward pace markedly, increasing by only 3.1 trillion won. This was attributable to the limitation of the issue of corporate bonds by large companies following the imposition of ceilings on corporate bonds holdings and agreements between companies and their prime banks on improvement of corporate financial structure; in addition to which the demand for funds of this type lacked depth. In the first quarter, CP issuance was up by 21.7 trillion won as the five largest chaebol borrowed external funds on a short term basis and investment trust companies expanded their purchases of CP to ensure short term liquidity. In April 1999, the upward trend of bank loans(including trust account loans) slowed(+1.7 trillion won) whereas the issue of corporate bonds expanded(+1.0 trillion won) compared to the preceding month(+6 billion won). However, the scale of the increase in the issue of corporate bonds was far less than the monthly average during the previous year. CP issuance during April 1999 contracted by as much as 9.1 trillion won, because companies' demand for working capital slackened in addition to the heavy bunching of the maturities of CP issued during the first quarter.

      Stock prices, during the first quarter of 1999, showed an upward trend as domestic and foreign investors bought stocks on lower market interest rates and expectations of a coming economic recovery. Thus, KOSPI reached 619.3 at the end of the quarter. This trend continued in April, supported by an upsurge in optimism concerning economic recovery and an inflow of funds into the stock market in response to the decline in interest rates, with KOSPI standing at 752.6 at the end of the month.

 

[Table 14]   Financial Market Trends
            
(Change during the period)

Unit : billion won          


1998

1999

year

Apr.

Deposit money banks1)

11,187.8

8,187.2

32,192.3

14,456.8

2,737.0

Money-in-trust2)

-17,693.2

-3,202.9

-39,167.8

-14,539.6

-896.9

Investment trust companies

44,400.3

36,638.3

109,573.4

40,371.2

7,934.1

Merchant banking corporations

4,023.7

2,951.0

-2,654.0

929.3

-882.8

Bank loans

-5,430.3

-7,604.9

-14,692.6

3,310.7

1,733.3

    Bank account loans

-912.6

-2,439.2

1,649.2

6,526.8

2,799.6

    Trust account loans3)

-4,517.7

-5,165.7

-16,341.8

-3,216.1

-1,066.3

Net bond issuance

14,131.9

13,155.4

32,701.1

3,078.7

1,046.2

Discount of CP4)

9,251.8

-19,209.3

16,597.0

21,684.6

-9,099.7

Composite Stock Price Index5)

310.3

562.5

-

619.3

752.6





 The Bank of Korea