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Korea Report – January 2004

Author : Hwang & Co Date : 04-02-23 16:09 Hit : 36777

*Topics.

-Prosecutors' investigation may unrecognizably change Korea's political landscape.
-Foreign ministry shaken due to the conflict on foreign policy toward USA.
-SARS and bird flu rocks Asia.
-Korea agreed on US plans to move its troops out of metropolitan Seoul.
-Korea's exports surged, while consumer's sentiment remained low.
-Delinquency in card company deepened.
-Foreign purchase continued in KSE.
-Korea Line faced a hostile merge after Golar's acquisition.

*GOVERNMENT AND POLICY

Korea's political landscape may be almost unrecognizable when voters go to the polls this Spring, as prosecutor's months long investigation on illegal financing of the presidential campaign in 2002 concluded to arrest 8 key law makers who are mainly accused of graft, ranging from KW50 mil to KW10s of bil. A dozen more politicians are likely to face legal punishment for their receiving bribery or misappropriation of funds.
Prosecution searched the offices of Hanhwa Group, 6th largest chaebol in Korea, following its raid of the offices of Samsung, LG, Hyundai Motor, Lotte and Kumho groups last year. Kumho Group is accused of delivering about KW1.5 bil to GNP and about KW1 bil to MDP. Prosecutor raided the headquarter of Daewoo Construction, to investigate the company over its alleged illegal donation of KW1.2 bil to GNP and 800 mil to Roh's camp during presidential election in 2002.

The main opposition party, GNP's floor leader, caused a political stir when he compared people with favorite impression of NK's Kim Jong-il to some staunch supporters of President Roh Moo-hyun, saying "A recent poll showed that 10% of entire public shared favorable feeling toward Kim JI, while other 10% were neutral toward him, and those 20% were the strong supporters of Roh".
President Roh, whose approval rating dropped to about 30%, plans a special amnesty to mark the first anniversary of his inauguration, pardoning 5 key figures in previous government, involved in secret money transfer to NK before inter-Korea summit in 2000. Opposition parties blamed it to aim at winning former president Kim DJ's support for pro-Roh Uri Party during the general election in April.

Foreign Minister, Yoon Young-kwan, resigned, after the Chungwade, presidential office, investigated officials in Foreign Ministry North American Affairs Bureau, suspected of making "inappropriate and intolerable comments" about President Roh's equal footing policy toward USA, and ordered the ministry to discipline the concerned officials. Government appointed Ban Ki-moon, ex Ambassador to Austria and deputy minister of Foreign Ministry, as new foreign minister, expecting him, taking advantage of his 34 years experience in the ministry, to resolve deeply rooted conflict between the officials in foreign ministry and presidential advisors at National Security Council, and mend ties with USA. He has to balance between the growing call for increased self-reliance and the traditional dependence on USA. A director general of North American Affairs Bureau was transferred to presidential NSC, a director of North America Div III was stripped of his position, and another official in the same division received a warning.

China government ordered some 10,000 civet cats killed after genetic tests suggested a link to suspected SARS case. Chinese health official confirmed SARS with more than 7 suspected cases, while 3 Hongkong journalists were hospitalized with SARS disease.
Bird flu that has jumped to humans in Vietnam and Thailand is spreading throughout Southeast Asia. 6 Vietnamese and 2 Thais have died as of Jan 25. The disease outbroke almost simultaneously in 7 Asian countries such as Thailand, Cambodia, Japan, Taiwan, Vietnam, China and Korea.
Korean government decided to establish an emergency healthcare system to prepare for possible human infection from bird flu, in line with warnings by WHO. Korea has culled more than 2 mil chickens and other fowls and quarantine any infected people, and is to spend KW11.3 bil to purchase 6.5 mil chickens and 400,000 ducks to stop a continuing decline in poultry prices because of bird flue.

The 63 professors of Seoul National University made a proposal to build a nuclear waste disposal facilities in the school site on the firm belief that the facilities poses no threat to the security of the people, in a bid to end the 7 months dispute between government and residents over the planned construction of the facility in the County of Buan.
Ground was broken for National NanoFab Centre, Korea's first building solely devoted to nano-technology research in Daejeon with the investment of KW290 bil over next 6 years. KOGAS finalized the plan to establish pipeline through the bottom of West Sea to link Irkutsuku gas field to Korea, with the investment of KW780 bil. Daewoo International explored the large gas field in north Myanmar with estimated reserve of 18 tril cft.
The Seoul High Court overruled a lower court's ruling, to order the resumption of a suspended massive tideland reclamation project in Saemangeum on the southwest coast of the Peninsula, saying the delay would seriously harm the public interest. About 40,000 hectares tidal flats project has been in dispute between Agriculture Ministry and number of opponent activist groups.
South Korea's population grew 0.3% this year, the lowest rate in 30 years, to a total 48.387,007 as of Jan 1. New employees at large Korean corporation this year seem to receive an average annual salary of KW26.21 mil.

Japanese PM Koizumi visited the Yasukuni Shrine on Jan 1st, which commemorates the country's military dead including 14 war criminals convicted after WWII and has been considered a symbol of Japan's past militarism, to pay New Year's homage. Japanese PM insisted that Dokdo Island in East Sea belongs to Japan, in response to Korea's plan to issue stamps featuring the tiny islet, urging Korea to scrap the plan.

*NORTH KOREA AND NATIONAL DEFENSE

Korean Prime Minister ordered officials to tighten security for overseas Korean missions, citizens living or traveling abroad and domestic airlines, in a bid to prevent possible terrorists attacks, after Korean Embassy in Thailand received a letter threatening attacks on Korean owned companies and properties in Southeast Asia.

Former US ambassador to Korea and 2 Senate aides visited a nuclear complex in NK under the agreement of NK, who promised to show them its "nuclear deterrent". NK reiterated that it would refrain from testing and producing nuclear weapons, and stop operating nuclear power industry, as a first phase of measure toward the resolution of its prolonged nuclear standoff. SKorean and US officials welcomed it as a good signal for convening 6 party talks on NK nuclear weapon program.

USA plans to shift long range bombers and other war planes to Guam and elsewhere in Asia and Pacific to offset a loss of combat power, as thousands of American soldiers and marines in that region depart for duty in Iraq and Afghanistan.
Korea and USA agreed to relocate all American troops out of metropolitan Seoul to Pyongtaek over the next 3 years. US military decided 6 months ago to move its 14,000 strong combat unit of 2nd Infantry Div from the border line to Pyongtaek. Korea has agreed to shoulder all relocation costs, estimated at KW3.6-6 tril, but analysts forecast it would virtually be impossible for Korea to cover all the cost alone, considering the national defense budget standing at around KW19 tril. Defense Ministry plans to sell the land to build the commercial building, while Seoul Metropolitan government wants to secure the site at no cost to turn it to a large scale national park, as public and recreational space worthy of its metropolitan status, not business or residential spots. The relocation of the Yongsan base is a key part of US reshuffle of its 37,000 troops in Korea aimed at redefining the alley's half century military alliance.

*ECONOMY AND POLICY

Korea's economic growth in last quarter in 2003 rose 3.6% on year at its fastest pace last year. Finance Minister determined to gear its economic policy up for realizing 6% economic growth this year, while Deutsche Bank predicted it at 5% in 2004, attributing to strong export and a modest recovery in consumer spending. Government plans to spend KW87.2 tril, out of KW159.1 tril total 2004 budget, during first half of this year, aiming at bolstering economic growth by domestic consumption.

Korea's trade surplus ballooned to nearly $3 bil in Jan, growing at fastest pace in 4 years. Export surged 33.2% on year to $19 bil, the highest rise in 35 months, while imports rose 11.3% to $16.1 bil. Korea's export of digital electronics products rose 22.1% on year to a record $74.71 bil last year. Korea's deficit in semiconductor trade reached nearly $2 bil, the largest figure ever, due to sharp increase in imports of nonmemory products. Korea's automotive industry achieved a $19.6 bil trade surplus last year. Korea is expected to record a fiscal surplus of KW7.1 tril, about 1% of estimated GDP, this year, more than 3 times of last year's.

China remained the most preferred investment destination for Korean companies last year. They invested $4.05 bil in China during first 11 months, nearly 50% for all of 2003, becoming third largest foreign investor to China, following Hongkong and Japan.
600 largest domestic companies plan to invest a total KW56.4 tril to expand facilities and carry out R&D projects this year, up 17.1% on year, in an effort for job creation to jump start the economy.
The foreign equity ownership of major Korean companies becomes significantly higher than their largest Korean counterparts at the end of last year. For instance, overseas investors hold 66.71% in POSCO while major Korean share holder has mere 3.77%. At Samsung Electronics, non Korean hold a 57.3% stake, whereas its chairman owns 15.31%.

A whirlwind of layoffs is expected to hit the troubled Korean credit card industry from next month. KEB Credit Service and Samsung Card plan to lay off about 55% and 30% of its full time employees, respectively. LG Card and Woori Card will follow the case.
The number of credit defaulters rose for 18th month to record 3.72 mil at the end of Dec, while card issuers' delinquency ratio reached 27% by end of Sept. S&P Ratings warned that Korea's credit card companies need KW9 tril in fresh capital to continue operation.

LG Card, Korea's largest credit card company, suspended its cash-advance service second time in less than 2 months due to a liquidity problems, threatening the industry that, If LG Card goes bust, local financial institutions may face as much as KW27 tril in losses, sending a shock throughout the Korean financial system. A day after LG Card suspended cash advance service, president of 16 financial institutions met to fine-tune the details of KW5 tril rescue package, and agreed to inject KW1.65 tril in new loans convertible into equity, on top of the KW2 tril in emergency loans poured in late last year. LG Group agreed to provide further KW1.38 tril to its card unit. KDB emerged as the largest share holder with a 25% stake and agreed to provide upto KW125 bil of the estimated KW500 bil in further capital needed to ensure survival of the company.
KEB, which is controlled by Texas-based Lone Star Fund, appointed Robert Fallon, 56, a career banker who teaches at Columbia Business School, as its new president.

*CHAEBOL

Korea's major chip makers are planning a record KW7 tril investment in facilities to keep pace with a bright outlook for their industry. Korean automakers are looking to break last year's record and export more than 3 mil vehicles this year, aiming 3.24 mil, up 26.6% on year. Korean steel makers shipped about 40% of their exports to China last year, up 60.1% on year. Kia Motors, Korea's second largest car maker, recorded fastest growth rate in terms of market registration in EU last year, registering 107.631, up 48.4% on year.

Total capitalization of Samsung Group exceeds KW100 tril to KW106.7 tril, equivalent to about 22.5% of total value of stock exchange market.
SEC recorded its 4th quarter profit of KW1.86 tril, up 24% on year, helped by stronger investment and demand in chips and flat screen displays, but net profit edged up only 1.1% on quarter, because of losses at its credit card affiliate Samsung Card.

The entire value of the stake in LG affiliates held by Chairman Koo Bon-moo was cut in half last year as LG Card saw its share price plummeted following its liquidity problems, losing 91% of its value. LG Life Science signed a contract with UN organization for massive export of its hepatitis B virus drug, worth around $22 mil, which is about 50% of the total drugs distributed around the world.
Prosecutors arrested SK Group Chairman, Son Kil-Seung, for his allegations that he raised and misappropriated huge sums of slush funds, being accused of stashing away KW239 bil in secret funds through SK Shipping and diverting some KW100 bil for investment in overseas futures. He allegedly handed over KW1.1 bil illegal funds to a close aide of President Roh shortly after he won the election and delivered KW10 bil and KW2.5 bil to GNP and Roh's camp respectively, during campaign.

Hyun Chung-eun, Chairwoman of Hyundai Elevator, defacto holding company of Hyundai Group, reiterated to try again to turn the company into a public corporation through a large scale rights offering, and expressed her confidence to keep the managerial control over the group through the general shareholders' meeting in March, despite a hostile takeover attempt from KCC whose owner is the uncle of her late husband.
Standard & Poor's lowered its credit rating on KCC one notch to "BBB-", warning that it may further lower, if it persists in its controversial takeover of Hyundai Elevator.

*MONETARY AND ECONOMIC INDICES

Korea Stock Exchange started the year with KOSPI at 821, climbed to 869, the highest in 20 months by aggressive foreign purchase with more than KW1 tril investment for 8 consecutive sessions, and closed the month at 848. UBS AG forecasts KOSPI will rise to 950-1,000 in next 6-12 months, citing positive economic outlook this year.
KWon exchange rate started 1195 against USDollar at the beginning of the month, kept 1180 level quite a while under government's persistent intervention, lowered to 1172.3, its strongest point in over 2 months on the back of heavy stock purchases by foreign investors, and ending the month at 1177. Government made it clear to continue its intervention to lower the value of KWon against USDollar until the recovery in domestic consumption is in full swing. Foreign exchange reserves continued its gain to $157.45 bil at the end of Jan, increased by $2.1 bil from the end of last year.
Korea's consumer prices in Jan had their biggest gain in 4 months, marking 0.6% rise on month and 3.4% on year. Surging international crude oil prices are placing inflationary pressure on Korea. BOK estimated that a 10% movement of oil prices leads to an average 0.37% change in consumer price and 0.61% for producer prices.
Unemployment rate at the end of 2003 stood at 3.4%. BOK froze the target call rate at 3.75% PA. Commercial banks have lowered their deposit rate from 4.5-4.7% to 4.1-4.4%. The yield on 3 years corporate bond ranged 5.57-5.63-5.7-5.59-5.74% through the month.

*SHIPBUILDING AND SHIPPING

Korean shipbuilders received record orders in 2003 with 470 units of 28,0 mil GT including high value added ships like 12 units of LNG carriers and 62 units of container vessels bigger than 8,000 TEU. They are struggling with steep price rises of steel plates. POSCO raised the price from KW400,000 per ton to KW430,000 in Jan. The price may rise again, as the demand for steel plates is likely jump 12.5% in 2004 from 4 mil tons in 2003.

HHI signed a contract with Hanjin Shipping to build 5 x 6622 TEU container carriers, constructing 3 in HHI and 2 in Samho. The project will be financed by KOEXIM for 85% on CIRR+0.32% for 12 years and Credit Lyonnais of 15% for 12 years on Libor+1.4%. HHI secured orders from Maersk Sealand for 2 x 4300 TEU, Wilh Wilhelmsen 2 x 6500 PCTC, Samco 3+1 x VLCC, Novoship Novorossiysk 2 x 105K tanker, TeeKay 4 x Aframax tanker and Interorient 2 x 116K tanker. Samho received orders from CMA-CGM with 2+2 x 8200 TEU carrier and Geden Lines 3 x 159K tanker. HMD made contract with Interorient for 4 x 37K PC, Tsakos Energy 2+2 x 37K PC and Barclay 3+3 x 37K PC.

DSME received the orders from MSC for 4 x 8300 TEU and MISC 2+2 x 7900 TEU container carrier. STX is to acquire and burn its whole 30,000 preferred stocks to protect the investors' interest. STX contracted with Parakou for 2 x 74.7K and 2 x 51K PC, and Motia Compagnia di Navigasione 4+2 x 29K PC. Samho made contract with Blystad for 2+2 x 12.8K chemical carrier. Daesun secured an order from CK Line with 1 x 960 TEU container ship.

Korea Line has seen skyrocketing price of its own stocks last year by 449% increase from KW4,000 level, as the company has well performed with constant earning from LNG and COA from larger bulker, as well as the strength in spot market with bulkers. Its performance dramatically improved with operational profit of KW70 bil on sales of KW600 bil, expecting debt ratio dropped to 200% level. Golar LNG acquired 9.94% stake during Dec last year, increasing foreign share holding to 43.14%, with suspicion over the hostile merge. HMM recorded the net profit at its petrochemical product division in Jan set a monthly record of $25 mil, up 380% on year, on sales of $56 mil, up 170%. HMM has 20 oil carriers, including 14 VLCCs.