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Permalink Reply by Robert Eberenz on July 9, 2010 at 6:21pm

***BREAKING NEWS***

My analysis was proved wrong today by an announcement from the Bank of Korea...

The Bank of Korea raised the core rate from 2.0 to 2.25%, marking the first change in 17 months. The KRW traded up today on the news as Asian shares also traded up today on the news.

Bloomberg reports... http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a9VFBe2...

Rising rates is usually positive for currencies. Can the KRW continue to climb? Will Korean stocks suffer? Weigh in and speak your mind!

Permalink Reply by Steven S. Bammel on July 10, 2010 at 11:50am

Interesting analysis. Thanks.

But I would have to take issue with your assertion that when money is spent in an economy, the effects are equal. It may be that the economy as a whole doesn't care much where the money is spent, but specific constituencies definitely do. The Four Rivers project is a boon to the construction industry, whereas the green portions of the stimulus package are helping companies positioned to take advantage, and harming those who aren't.

As a second point, I've noticed that there's always a disconnect between what economic analysts are saying and what the average Korean businessperson will admit. Perhaps the decades of ultra-rapid growth in the 70s and 80s spoiled Koreans about what's "normal" but in my 15 years in Korea, I've seldom had a Koreans say something like "The economy is great these days!". The comments are consistently negative and in my memory, this goes back to 1995 while working in LG.

I can remember even after the 1997 IMF crisis hearing well into the 2000s that the economy was still even worse than it had been in 1998. Ask the average Korean now how things are, and they'll tell you it's bad for everyone but the chaebol. Perhaps this is true and maybe it reflects increasing concentration of wealth in the hands of the business elite.

This is in contrast to the rosy reports from the IMF and others(such as reported in this week's Korea Economic Slice), as well as the neverending efforts by the government to foster "small to medium-sized enterprises" which never seem to go anywhere...

But in spite of it all, Koreans remain optimistic about the future and the country keeps doing quite well for itself, with a standard of living that keeps rising.

This is one of those areas of mutual contradictions of living in Korea that seem to never reach an easy-to-understand resolution.

Permalink Reply by Ondrej Slechta on July 11, 2010 at 6:52am

The 1W repo increase

Robert, your analysis was right, your bet was wrong :-) But if it helps the markets bet approx. 80:20 against an early hike so you were not alone at all ;-)
So where to go next? This pretty much depends on the global growth in the 2nd half. There is still the chance of a major turbulence due to the situation in (not only) Southern Europe but if the EU keeps above water Korean growth will stay strong and they will need to move the rate up again later this year by 25-50 bps.
The revised 1st Q growth in Korea was spectacular but the BOK decision will cool it down and inflation will remain under control.


Money in the economy

It's true that both tax cuts, direct stimuli, or increased government purchases all have the same impact on direction of the IS curve shift (in the short run that is). Scrappage schemes have worked well across Europe. But it's hard to compare effect of these policies with large degree of precision because each decision is made in unique circumstances.
Regarding the redistribution of subsidies, yes, many companies are left out, I believe the government just believes that the green stuff will drive the future and the more they invest to it now the higher will be the impact upon GDP in the future. They’re right in a sense because ultimately we'll run out of oil one day and we're going to need new technologies badly.


Economists versus businessman

Conceptual note: suppose sales increased and accounting profits are zero. Economists will report higher GDP but businessmen will be crying because its the workers who took all the money home with them.

But in general, I agree that the setup of Korean economy doesn't treat many smaller businesses nice. Large portion of the Korean GDP comes from exports of semiconductors and consumer electronics, ships, and automobiles. These are some very difficult sectors. Global competition in the semiconductor business is cut throat, ships take too long time to build and you go through two downturns before a ship is finished, and auto sector has been in difficulties for past 6 years.

When you check profitability of Korean companies along the whole value added chain in these three sectors, typically the chaebol the star, a couple of tier one suppliers close to the "family" are doing ok, and the rest is garbage. Pressure on suppliers is immense; their margins are being wiped out by constant pressure on material prices from the chaebols which have a very strong negotiating position. Some of the SMEs cook books to understate profitability so that they at least somehow improve their negotiating positions towards their customers. Their customer portfolios are very concentrated. Relationship between chaebol and SMEs reflects rigid Confucian values (they are expected to be respected upwards, not downwards). In Korea, it is very easy to cut a supplier off, especially in case of less technologically demanding supplies. Supply contracts are often non-existent or vague, and perhaps due to cultural barrier it is not always that easy for a Korean SME to close a long term deal with a new foreign customer.

Business in Korea is very intense for these reasons and the businessmen probably also mix in their personal income issues (enlarging income gap, ever increasing expenses on education, problems on the real estate market) when they talk about the economy.

Permalink Reply by Robert Eberenz on July 11, 2010 at 11:58pm

Steven, great points all around. My point was merely that when accounting for GDP growth, money spent is money spent. I may have not emphasized this in a focused enough manner, but there are definitely winners and losers within the economy itself when it comes to stimulus vs. tax cuts, etc. The point made here was that the General GDP growth and net economic growth as a result is a "wash". With tax cuts come higher profits for owners, who generally spend less and save more (siphoning money out of the economy), while stimulus must travel through the inefficient bureaucracy of government (earmarks, pet projects, and pork barreling cause money to line the pockets of interested parties; also drawing stimulus money away from its goal).