2009 has been a really interesting year for Dynamic Korea. In the first half of 2009, Korea’s FX market as well as its overall economy pitched and rolled due to the short-term USD liquidity problem. Korea’s CDS premium skyrocketed to over 300 bp. Major foreign press, including the Financial Times, were pessimistic regarding Korea’s economy, insinuating that the country might have to call for moratorium on short-term foreign debts.
However, it wasn’t long until the truth revealed itself. Korea showed a 3.2% Q on Q growth rate in the third quarter of 2009, the best recovery among OECD countries, and showing strong evidence that the foreign press were wrong. By October, the CDS premium had dropped to below 100 bp and by November its foreign reserves exceeded USD 270 billion, hitting a record high. It goes without saying that some foreign investors and businessmen who truly understood Korea’s economical environment benefited from such a dramatic recovery. As Sir Francis Bacon, an English philosopher and statesman, said, scientia est potentia- Knowledge is power. In this regard, it might be intriguing to look at what lies ahead for Korea next year.
The Korea Development Institute (KDI), a major think tank for the Korean government, recently announced that Korea will show a 5.5% GDP growth rate next year. The government estimation was around 5%, slightly up from its initial prediction of 4%. Can it be so? It will take a long time to examine the possibility in detail. However, I would like to put forth several arguments supporting the outlook.
First, the Korean government will continue with its current expansionary fiscal policy and the Bank of Korea will stay on the easy money policy, at least for the first half of 2010, since both have the ability and intention to further boost the economy; and since an exit policy cannot be implemented until G20 countries agree. The fourth G20 Summit will be held in Canada in late June, 2010 and Korea will host the fifth G20 Summit in November, 2010. So, it’s unlikely that the Korean government will launch a full-scale exit policy before then.
It has also been noted that President Lee Myung-bak will embark upon his cherished four-river restoration project during the first half of next year. Furthermore, as various political scientists and economist have pointed out, the ruling party and government are bound to simulate the economy until the local elections in June, 2010. Moreover, the government, without doubt, will seize every opportunity to improve the nation in various aspects, not to mention the economy, when hosting the G20 Summit in November. In addition, local corporations and financial companies are expected to reinforce their marketing activities by making the best use of two events: the 2010 Vancouver Winter Olympic Games in February, where the world’s No. 1 woman figure skater, Kim Yu- Na, will compete for the gold medal; and the 2010 FIFA World Cup in June and July, in which the Korean national soccer team will participate.
Although global market conditions are still unstable and uncertain, there are some advantages for Korea. One is that Korean exporters can enjoy the benefit of a strong Japanese yen. Another is that, China’s yuan is expected to appreciate in the first quarter of 2010. As far as yen and yuan remain strong, Korea will continue to be in a better position than Japan and China in the global export market.
All things considered, I believe that Korea’s robust recovery will continue in 2010. In the long-term, however, everything is bound to reverse to the mean and the Sword of Democles is always swung t over the head of a success. Let’s keep these two aphorisms in mind when looking forward to a prosperous 2010, the year of the tiger.