Trouble in the Economy

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Trouble in the Economy

Is the party over? The emotional aftershock from the historic inter-Korea summit talks hasn‘t yet completely faded, but the cold reality is slowly starting to sink in.

In the capital market in particular, conditions don’t look too good. Except for companies like Samsung, LG, SK, Lotte and a few of the strong small- and middle-sized companies, most firms are having trouble gathering enough cash for company maintenance. Regardless of the size or business performances of the companies, it simply isn‘t easy to find capital on the market these days. Loans from banks are impossible to come by, and even if companies issue corporate bonds or commercial papers there are no financial companies that will purchase them. Because of the situation, the stock market has plummeted, in spite of the summit talks, and there are strange rumors circulating in the market. As soon as Minister of Finance and Economy Lee Hun-jai came back from Pyongyang, he released plans to allow banks to run short-term trust investment products and funds exclusively for investing in bonds worth $8 billion. The point of all this is to use all means possible to stimulate cash flow from banks into companies.

These plans are almost inevitable, because banks are protecting themselves and getting ready for the insolvency public announcements planned for late June. But the government can‘t run away from criticism that it is treating simply the symptoms and not the root causes when it tries to tackle problems and distrust in the market by releasing short-term products. If the government’s plans don‘t improve the capital market by the end of the week, the problems could endure for some time.

The week will also kick off with conflict between the government and doctors on the division between hospitals and pharmacies - contributing to bringing Koreans back down to earth after the excitement of the summit.

Procedures for the economic cooperation plans that were agreed to at the summit talks will start to take a little more shape during the week. It’s hard to expect something impressive but it looks like plans regarding North Korea‘s economic infrastructure will be launched first.

It’s also interesting to see how the battle between the brothers at Hyundai will develop this week. It’s been four weeks since it began. Hyundai Motors, led by Chung Mong-koo, will finalize its strategic agreement with DaimlerChrysler during the week. It will be interesting to see if this helps Chung keep his management rights.

Oversees, oil prices are something to keep an eye on after they rocketed as high as $32 a barrel last week. Luckily the Organization of Petroleum Exporting Countries (OPEC) has agreed to increase oil production to dampen the rise in prices. But the Bank of Korea expects the price of oil to remain over $25 per barrel until September. That will add to the costs for companies, and possibly prompt a rise in consumer prices.

On the bright side? The chances that the U.S. Treasury will raise interest rates are fairly low.

by Sohn Byung-soo

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