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KOREA REPORT - OCTOBER, 2018.
President Moon¡¯s
nine-day trip to Europe scored a little-success, where he had two
major diplomatic objectives, arranging a visit to NK by Pope Francis and
persuading European leaders to ease sanctions on North. Moon¡¯s visit to five
European capitals had been arranged in time for the biennial Asia-Europe
Meeting that brought together 21 Asian and 30 European leaders to Brussels. He
also visited Copenhagen to attend the inaugural meeting of the Partnering for
Green Growth and the Global Goals 2030 and the Paris Climate Agreement. On the
sidelines of the two multilateral meetings, Moon held bilateral talks with
British PM Theresa May, German Chancellor Angela Merkel, Thai PM Prayut
Chan-o-cha and EC President Jean-Claude Juncker. He also visited the Vatican
and France. But Moon failed to win the blessing from European leaders for his
call for sanctions relief on the North. In his meetings with French President
Emmanuel Macron and British PM Theresa May, Moon sought to enlist their support
for his call for easing sanctions on the North, which he said was necessary to
provide assurances that NK has made the right choice to denuclearize and
encourage NK to speed up the process. But
Macron emphasized a complete, verifiable and irreversible denuclearization and
May also urged Pyongyang to prove its commitment to complete denuclearization
with more concrete action.
Concerns over the
inter-Korean military agreement adopted in Pyongyang on Sept 19 have not eased
much. The clause to establish a no-fly zone is probably the most
risky. Due to the zone over the military demarcation line, unmanned aerial
vehicles that SKorea planned to deploy will become useless. Their detection
distance is a few km, while the zone stretches 10-15 kms from the line in
either a southern or northern direction. Drones capable of reconnaissance from
outside the zone, ultrahigh-altitude reconnaissance aircraft and artificial
satellites can still watch the NKorean long-range artillery near the line, but
these are American assets. Securing transparency of military activities through
verification is the basis of trust, and is indispensable about a surprise
attack. Ultrahigh-altitude reconnaissance can be carried out by the US, but
scanning NKorean troops from the front line is a job the SKorean military has
to do. The zone will effectively blind frontline units and undermine their
attempts at verification as well.
SKorea and the US are
falling for NKorean leader Kim Jong-un¡¯s ¡°tricks,¡± Bruce Klingner, senior fellow at Heritage Foundation said. His
warning comes amid concerns over SKorea¡¯s efforts to expand cross-border
exchanges at a time when NK-US talks aimed at moving forward on the
denuclearization of the Korean Peninsula appear to be at a standstill. ¡°The US
continues to have a smile publicly on its face, but in my discussion with US
officials, they are very, very concerned or even angry about President Moon¡¯s
NK policies. Washington has sent a number of very strong messages to the Moon
administration to slow down,¡± the former CIA deputy division chief for Korea
said. SKorea¡¯s request for exemptions to the UN and US sanctions also raised
alarm bells in Washington, undermining the US-led pressure campaign.
Korea¡¯s public
corporations are set to suffer from shrinking profits and mounting debt, largely,
as some experts criticized, due to Moon administration¡¯s policies on energy and
employment. Since its launch in May last year, Moon government has pushed to
replace nuclear power generation with renewable energy and create a massive
number of jobs in the public sector. Such moves have placed heavier financial
burdens on utility companies in particular. Combined net profits earned by 38
major public institutions with assets worth more than KW2 tril ($1.77 bil) are
projected to plummet to KW700 bil this year from KW6.9 tril last year. The
figure amounted to KW14.8 tril in 2016. Korea Electric Power Corp has lowered
its estimated net profits for 2020 by 78.1%. Korea Hydro and Nuclear Power and
other state-funded utility companies also expect their net profits to be far less
than estimated in 2016. Experts say utility companies will be compelled to
borrow heavily to cover trillions of won in annual facility investment if their
profits continue to decrease. With their profits declining, the combined debt
owed by the 38 major public entities is estimated to exceed KW500 tril for the
first time in 2020. KEPCO is expected to record the largest debt increase of
KW9.5 tril over the coming three years, followed by KW8.1 tril for the Korea
Land and Housing Corp and KW3.3 tril for KHNP.
Bank of Korea on 18th
held its policy rate at 1.5% for the 11th straight month on worsening economic
data and low inflation pressure, taking a wait-and-see stance since Nov
last year. BOK forecast 2.9% growth for 2018, down 0.1% from its earlier outlook.
Facility investment dropped for six months in a row, marking the longest
monthly decline since the 1997 Asian financial crisis. The number of newly
added jobs stayed below 10,000 on-month for two straight months in July and
Aug, fueling concerns that the economy is losing steam. Consumer prices have
still stayed below the target inflation of 2% for months, despite a recent
upside trend by an oil price hike.
SKorea¡¯s manufacturing
capacity index had declined for five consecutive months as of July, from 102.9
to 102.6. The annual average figure for 2015 is set at 100. The index
reading for July represented a downward slide of 1.3% on-year, the steepest
on-year decline since 1971. The index dropped 0.6% on-year in March, 1% each in
April and May, and 1.1% in June. The continual downturn in the country¡¯s
manufacturing capacity comes as Korean economy is having difficulty finding new
growth engines while its key traditional manufacturers face intensifying
challenges from foreign competitors, especially Chinese firms. A rise in
exports, mainly on the strength of export of memory chips and petrochemical
products, should not veil the weakening of other manufacturing industries. The
capacity index for shipbuilding plummeted from 104.3 in Jan 2015 to 68.3 in July
2018. The weakening of the manufacturing sector comes with falling employment
levels. The number of workers hired by manufacturing companies in Korea
declined from 4.48 mil in 2016 to 4.42 mil last year. The US, Japan and Germany
saw their manufacturing workforces expand from 12.35 mil, 9.96 mil and 7.9 mil
to 12.55 mil, 10.06 mil and 8.01 mil, respectively, over the period.
Korea¡¯s Composite Stock
Price Index started the month at strong at 2,338, but continued to fall
breaking 2,300 barrier, following a plunge in stocks at Wall Street amid surfacing doubts about current tech stock valuations in the
US and fears on lingering US-China trade war threats. KOSPI dropped 4.4% to
close at 2,129.67 on 11th, the largest daily losses since Nov and Sept 2011,
and the lowest since April and Sept 2017, respectively. Bearish market sent KOSPI below the psychological threshold of 2,000 to
1,996 on 29th, once again renewing
its all-year low, despite the government¡¯s urgent moves for countermeasures with fresh inject of some KW500 bil ($438 mil). This marked the
fifth consecutive day of market retreat, as well as the first time in 22 months
that KOSPI fell lower than 2,000. KOSPI
has recovered 2,000 level to close the month at 2,029.
KDB has decided to
offer financial supports of KW1 tril (about $878 mil) for its struggling
compatriot shipping major HMM. HMM has decided to issue KW400 bil of
convertible bonds (CBs) and KW600 bil of bonds with warrants (BWs). The entire
offering will be taken over by the KDB, HMM's biggest shareholder. HMM ordered
20 containerships from HHI, SHI, and DSME, so that it is liable for payment of
KW300 bil, 10% of the whole construction costs KW3 tril. In addition, HMM
needs funds for Busan New Port Pier 4, buying containers, etc. The government has recently
prepared a plan to help normalize HMM and is closely consulting with the
company to expand its capital by KW800 bil by the end of the year. If HMM
issues equity securities, KDB and KOBC, which was launched in July, are
expected to purchase KW400 bil worth of securities each. As other global
shipbuilders are growing up by M&A and dominate the market with economies
of scale, HMM needs to be raised to the level of 1 mil TEUs to secure global
competitiveness. HMM will be able to secure about KW5 tril of funds by
combining the investment funds and the government's additional financial
support for ships by the end of this year. Meanwhile, KOBC, which was launched
with the aim of rebuilding the domestic shipping industry, will take the helm
of the realignment of the domestic shipping industry on the occasion of its
support for HMM. By 2020, HMM will be
jointly managed by KOBC and KDB, and since then, KOBC will take over the
management authority to lead restructuring.
President Moon¡¯s nine-day
trip to Europe scored little-success [p.2]
China and
Japan move to reinvigorate their economic partnership against US trade pressure
[p.3]
Korea
granted one-year humanitarian stay permits to 339 Yemeni asylum on Jeju Island [p.3]
SKorea and the US are
falling for Kim Jong-un¡¯s ¡°tricks,¡± Bruce Klingner said [p.8]
NK requested the US to take corresponding steps in
response to its major conciliatory action [p.9]
US Secretary of State
Mike Pompeo visited NK, SKorea and China [p.9]
S&P maintained
its rating on SKorea at the third-highest level of "AA" [p.11]
Growing
uncertainties in the external environment pose downside risks to Korean economy
[p.11]
Korea¡¯s
public corps suffer from shrinking profits and mounting debt, due to gov¡¯t
policies [p.11]
SKorea¡¯s per-capita
GDP looks to surpass $30,000 this year and exceed $40,000 in 2023 [p.12]
Bank of Korea on 18th
held its policy rate at 1.5% for the 11th straight month [p.12]
IMF, OECD
and UBS lowered Korea¡¯s economic growth to 2.6-2.8% [p.12]
SKorea¡¯s
manufacturing capacity index declined for 5 consecutive months as of July
[p.14]
PERFORMANCE IN THIRD
QUARTER OF THE YEAR [p.15]
Lotte
Group Chairman Shin Dong-bin returned to work [p.16]
Fears on
US-China trade war sent KOSPI below psychological threshold
of 2,000 [p.18]
SKorea's consumer
price growth accelerated in Oct, hitting the highest in 13 months [p.19]
Market climate is
good to HHI, not so good to SHI and DSME [p.20]
Global newbuilding
orders recorded 738 units of 57.6 mil dwt as of end Sept [p.21]
DSME expect LNG
carriers for more than 50% of its annual revenue [p.24]
Hahn & Co has
become the largest shareholder of SK Shipping [p.24]
KDB to offer
financial supports for its struggling compatriot shipping major HMM [p.25]
Korean government to
help construction of 200 ships in the next three years [p.25]
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