South Korea: Suddenly, Impediments to Growth

Tensions with North Korea, stricter lending standards, an accounting scandal, and rising oil prices have combined to dim South Korea's economic outlook.

Consumers went on a borrowing binge last year when interest rates fell to near-record lows. The resulting jump in private demand helped real gross domestic product to shoot up by 6.3%, including a 2% surge in the fourth quarter.

But that borrowing produced a steep rise in defaults, and in late 2002 the government began plans to tighten lending requirements. Even so, by February the number of consumers who had missed loan payments for three months or more rose to a record 2.84 million.

Then financial company SK Global reported massive accounting irregularities in March. The scandal has led to fears about the health of the financial system, especially if ongoing government investigations uncover fraud at other companies. Meanwhile, the nuclear power play by North Korea is giving foreign investors the jitters: The South Korean stock market is off 9% since the start of the year.

Nor is Korea insulated from the Mideast conflict. Commerce Minister Yoon Jin Sik said exports have fallen by $55 million since the U.S.-Iraq war began, with more cancellations expected. And rising fuel prices are lifting inflation for a country that imports all of its oil. The Bank of Korea cut its estimate for first-quarter real GDP growth to a 4% annual rate from 5.6%. And private economists expect growth for all of 2003 to range between 2% and 4%.

Despite the dark clouds, Korea's economy has two critical pluses on its side. First, the labor markets are quite healthy, with unemployment at 3%. Second, and more important, the government had a budget surplus equal to about 4% of GDP in 2002, and Seoul is ready to use the cushion to boost demand. It has announced it will move forward public-works spending into the first half of the year to counteract the drags coming from the financial market and global tensions.

By James C. Cooper & Kathleen Madigan

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