Economy will struggle in 2015
Finance Minister Choi Kyung-hwan, center, and Vice Finance Minister Joo Hyung-hwan, left, listen to President Park Geun-hye’s speech during the 6th Economic Ministers’ Meeting held at the Blue House on Dec. 22. The government aims to boost local economy with restructuring. [Joint Press Corps]
Work has become so grueling that he hardly spends any time with his two children. He leaves for work at 5 a.m. every morning and returns home after midnight.
Despite his sacrifices, he was passed up for a promotion this year and couldn’t even ask for a year-end bonus. Things are so bad at the bank that a raise was out of the question.
A 41-year-old owner of a milk delivery service in Yongin, Gyeonggi, recently sold off his business.
Mr. Kim said he was forced to fold the business that he started in his late 20s because sales were dropping fast.
“The Sewol ferry tragedy had a huge impact on business and there have been no signs of recovery ever since,” Kim said.
“As people started cutting back on spending, one of the first things that they stopped buying was milk delivery. The financial burden was building up every month, so I had to sell off my business.”
Mr. Kim found a job at a small company run by an acquaintance.
Despite the government’s aggressive campaign to pump some juice into the economy, a lot of Korean businesses are suffering.
Bold deregulations, interest rate cuts and even aggressive fiscal spending pushed since the second half of last year seemed to be countermanded by growing uncertainties in the global economy.
Ever since the global financial meltdown that started in late 2008 with the bankruptcy of Lehman Brothers, “overcoming crisis” has been the theme of just about every new year.
This year, the motto is the same, although the crisis might be different - and something like a new normal for Korea.
The government and many private institutions project this year’s growth to be in the mid-3 percent range. The Ministry of Strategy and Finance projects this year’s growth at 3.8 percent with export growing 3.7 percent and imports 3.2 percent. It expects a current account surplus of $82 billion.
It would also be the fastest growth the nation’s economy has seen since 2010, when the economy expanded more than 6 percent. A 3.8 percent growth rate would even be faster than last year’s, which is believed to be around 3.4 percent.
Although the Bank of Korea plans to revise its outlook for this year later this month, which could lower its projection from 3.9 percent, the central bank has continued to say that the economy is in a gradual recovery.
BOK Gov. Lee Ju-yeol stresses that the fear of the Korean economy entering a perpetual state of deflation like Japan has been overblown, citing 3 percent economic growth and an inflation rate that is above 1 percent. But a report by Statistics Korea last month showed that December’s inflation rate dropped to the zero percent level for the first time in 14 months.
Despite the government’s determined optimism, confidence in the private sector among both consumers and businesses has been waning.
The BOK governor admitted that the confidence of economic players including households and businesses was much worse than expected.
“Most of the impact caused by the Sewol ferry tragedy seems to have dissipated. But consumer spending has barely rebounded while corporate investment has slowed, and even though the government aggressively laid out stimulus programs, the effect is hardly visible.
“As stagnation in the economy grew and expectations of economic recovery fell, household spending and the confidence of economic participants faded,” the researcher added.
A BOK report on consumer confidence noted that the overall economic sentiment has contracted because of growing concerns over the global economy. Other than the United States, recoveries of major economies including Europe, Japan and China have become uncertain.
Although China is expected to post 7 percent growth this year, that is expected to be a historic low.
At the beginning of 2014, Korea was confident that things would finally turn around economically and confidence was building up. However, that confidence was nipped in the bud when more than 300 passengers on the Sewol ferry were killed in an accident on April 16.
To turn around the sagging sentiment around, Choi Kyung-hwan was named the finance minister and he tried various stimulation techniques, including interest rate cuts.
It seemed to work in July with the benchmark Kospi showing signs of exiting a limbo. Consumer spending also grew.
But the blip didn’t last long, and external uncertainties grew more worrisome. The recent turmoil in Greece and Russia is expected to further affect the global market as 2015 begins.
The BOK report even noted that there seemed to be a limiting effect on the government’s stimulus because of sudden changes in the global economy in the fourth quarter.
The fading confidence comes with some good reasons.
Korea’s annual growth may be above 3 percent, but the country’s quarterly (or quarter-on-quarter) growth hasn’t seen big improvements since 2010, when it nose-dived from 6 percent to 3 percent growth.
Most of the quarterly growth since 2011 has remained below 1 percent. There were only two times that quarterly growth was in the 1 percent range - and both were in 2013.
In the second quarter of 2013, the economy expanded 1 percent compared to the previous quarter and in the following quarter it grew 1.1 percent. But most of the time it remained below, which means that the economy had barely moved.
A report released by the BOK last month showed that Korean companies in the third quarter were struggling, with revenue growth hitting the lowest marks in five years and three months - returning to the state they were in after the global financial meltdown.
In the study of 1,519 listed and 151 non-listed companies, combined revenues in the third quarter fell 3.2 percent year-on-year. This was the sharpest drop since the second quarter of 2009 when revenues fell 4 percent.
Revenues of manufactures fell 5.19 percent, the sharpest fall since the second quarter of 2009’s 5.5 percent decline.
It said the biggest cause of the declining revenue was the higher value of the Korean won. In the third quarter, the Korean won was 1,033.2 against the U.S. dollar on average, whereas in the same quarter in 2013 it was 1,087.4.
Furthermore, the electronics industry tumbled 13.7 percent because of falling sales of smartphones.
The abilities of companies to generate profits have also deteriorated.
The operating profit to net sales ratio of the companies dropped from 5.1 percent a year ago to 4.2 percent. Manufacturers in particular fell from 5.9 percent to 3.3 percent.
With falling profits, the companies’ ability to pay interest on debt has fallen as well. The interest coverage ratio fell from 477.6 percent a year earlier to 389.4 percent.
Companies struggling to pay their debt interest even while making profits increased.
Those with interest coverage ratios below 100 percent increased from 29.5 percent to 30.5 percent.
This was the figure for the third quarter, and the last three months are expected to be much worse.
Companies have already taken measures to brace themselves for greater crises.
Some major companies have already decided to hold back on wage increases for this year.
At Samsung Group, 2,000 of its high-ranking executives decided to freeze their wages. Additionally, year-end bonuses - which can go up to 50 percent of annual salaries - were cut in half. The group’s flagship company, Samsung Electronics, suffered a major fall in its operating profits, which plummeted more than 60 percent in the third quarter.
The situation is expected to be similar or even worse in the fourth quarter.
Samsung decided to hold back its wage increases for the first time in 2009. At that time, each and every employee of Samsung accepted freezes in wages to overcome the global financial meltdown.
Other conglomerates are making similar moves to cut costs and prepare for the worst.
For the first time in five years, SK Innovation’s labor union has agreed to keep wages at their current level. The nation’s three major insurers - Samsung Life, Hanhwa Life and Kyobo Life - have made the same decision.
Experts are predicting that corporate restructuring will be seen in every industry this year.
“Since the global crisis [of 2008], corporate growth and profitability have been worsening,” said Chang Min, a senior researcher at the Korea Institute of Finance.
“Until now, companies that have reached their limits were able to survive thanks to the low interest rates, but once the interest rates start to be raised on the back of U.S. interest rate hikes, the insolvency risks of companies that are weak will increase significantly.”
Even government officials see a major shift within the business community.
“The difficulties of companies that are at their limits, particularly companies that are in industries sensitive to economic flows, seem to be building up,” said Shin Je-yoon, the Financial Services Commission chairman, during a seminar discussing legislation for corporate restructuring in November. “Next year, the main issue in the Korean economy will be corporate restructuring.”
A survey by the Korea Employers Federation showed that a majority of conglomerates were planning retrenchment in their business plans in 2014, as many view the current economic downturn with grave worries.
In a survey last month of 228 companies, 51.4 percent answered that they were planning retrenchments. That’s more than the 39.6 percent that gave the same answer in 2014.
This means that a majority of companies are planning corporate restructuring that will include layoffs and downsizing of new investments.
Among those that plan on cutting down their businesses, 46.9 percent said they plan on cutting back on principle costs; 21.9 percent said they will pursue work force restructuring; 12.5 percent said they will be cutting back on new investments; and 9.4 percent said they plan on selling assets.
For companies that are planning work force restructuring, 27.3 percent plan on accepting voluntary retirements while 15.2 percent plan to lay off employees.
Only 14.3 percent said they plan on expanding their businesses next year, which is a sharp drop from 47.9 percent in 2014. Also, 34.3 percent plan to keep the status quo, which is an increase from 12.5 percent the previous year.
Basically, conglomerates will be leaning toward a much more defensive strategy this year.
Small and midsize companies in the survey showed a more aggressive attitude, as 21.9 percent said they would be expanding their businesses, which is a slight drop from 30.1 percent a year earlier. Most companies, however, said they would be keeping the status quo.
But the business lobby group in its report noted that many small and midsize companies were keeping the status quo largely because they have no way to further tighten their belts, which they have been doing since 2012.
It was clear from the poll that a majority of the companies consider the current economic situation as having endured far longer than they anticipated. Some 66.7 percent agreed, which is more than the 43.5 percent that made a similar answer a year ago.
Some market analysts say a recovering U.S. economy could contribute to Korea’s export growth.
Some view it differently.
“The vitalization in the global market for 2015 seems unlikely to be strong,” said LG Economic Research Institute’s Lee. “As many countries will be focusing on growth centered on expanding their domestic markets and their service industries, the economic recovery of economies with strong domestic markets like the U.S. will continue. But for countries like Korea, whose economy is centered mostly on exports and manufacturing, companies will continue to struggle.”
Lee and his economic team projected the global economy expansion to be less than 3 percent, which is similar to last year’s.
“Korea’s exports will further struggle with growing competition from China and Japan,” it said. “And while the earnings increase resulting from exports is expected to be limited, the domestic economy will unlikely show any distinct signs of recovery.”
There are growing expectations including projections from global institutions like HSBC that the Korean central bank will be once again lower the key interest rate in hopes of bolstering the economy. In the second half of 2014, the Korean central bank lowered the key interest rate on two occasions to its lowest level of 2 percent.
But the central bank and domestic economy will be facing a new challenge by mid-2015 when the U.S. Fed starts normalizing its low borrowing rate.
If the Korean central bank continues to keep a loose monetary policy, it could trigger a massive exodus of foreign investments that could create panic in the local financial market. A similar situation occurred early last year when there were rumors that the Fed was ending its quantitative easing program, which it did near the end of October.
A report by the International Monetary Fund suggested that the Korean economy could suffer a near 1 percentage point drop in growth if the U.S. Fed raises the interest rate. If so, growth in the Korean economy could tumble into the 2 percent range.
If the BOK raises the interest rate in response to the Fed, the burden on debtors will go up. Although it would still be relatively light, household debt including credit card loans as of the third quarter was at an all-time high of 1,060 trillion won ($972 billion). After the BOK lowered the interest rate once again in the fourth quarter, that encouraged more loan-taking.
With larger debts and additional burden on interest payments, consumer spending could further deteriorate.
The problem is worsening confidence and that could place the Korean economy in a vicious cycle of deflation, especially with the inflation rate now basically flat.
Analysts say consumers are less inclined to spend and companies are less inclined to make new investments or expand their business, which could result in a further downward spiral of the economy.
To turn the tide, the government needs to push policies that encourage people to spend, particularly those in the higher income bracket.
“The biggest problem I feel nowadays is a feeling of helplessness,” said the banker who was passed up for a promotion. “I just wish there was some good news that would somehow make me believe that things would get better.”
BY LEE HO-JEONG [ojlee82@joongang.co.kr]
with the Korea JoongAng Daily
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