After decelerating through much of 2004, growth in Korea accelerated through the course of 2005, supported by both external and domestic demand. Growth picked up from a year on year pace of 2.7 percent in the first quarter to 5.2 percent in the fourth. Growth was particularly strong in the third and fourth quarters, reaching quarter on quarter annualized rates of 7-8 percent, led by a sharp rebound in exports, reflecting renewed strength in global demand for IT-related products. Private consumption also strengthened through the year, supported by stronger jobs growth and the positive wealth effects of surging stock prices. |
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The recovery in consumption and global electronics demand has filtered into corporate sector activity, resulting in a surge in facilities investment. Construction investment was however restrained in the latter half of the year, against a background of government measures to curb speculative transactions in real estate last August. Inflation has been subdued, in part due to the strengthening of the won. Core inflation came down to 1.7 percent in February 2006, well below the lower range of the Bank of Korea’s medium term target of 2.5-3.5 percent. However, the central bank projects that the strong economic recovery and persistently higher oil prices will drive core inflation above the mid-point of its target range in the second half of this year. Housing prices have also rebounded moderately since November, after restrictive government measures had stabilized the real estate market between August and October. As a result housing prices in the Seoul Metropolitan area have increased for seven years in a row through 2005. The Bank of Korea (BOK) commenced monetary tightening last October when it raised its target for the benchmark call rate (uncollateralized call rate) from 3.25 percent to 3.5 percent, in response to latent inflationary pressures and the rebound in real estate prices. The BOK continued to raise its target by 25 basis points in December and February of this year, sending the rate to 4.0 percent. Given the accelerating economic recovery, Korea’s government has no plan to frontload expenditure in the first half of 2006, as had done in 2005. The fiscal balance inclusive of the social security fund is expected to remain in a surplus of less than 1 percent in 2006. Surpluses on both the current and capital accounts of the balance of payments have continued to swell the foreign exchange reserves, which reached US$216 billion in February 2006, about 10 months of imports and almost 3 times the country’s short term debt outstanding. Meanwhile in March the government relaxed restrictions on capital outflows in order to mitigate the chronic over-supply of dollars in the foreign exchange market. Korea and Japan concluded a two-way bilateral swap arrangement to upgrade the Chiang Mai Initiative on regional financial cooperation in February. Korea’s domestic banks continued to strengthen their financial position. The average non-performing loan ratio of the banks fell to 1.2 percent at the end of 2005 from 1.9 percent at the end of 2004. Supported by an increase in net income of over 50 percent, the average capital adequacy ratio rose to a record 13 percent at the end of 2005. In addition, the six credit card companies have been improving in financial health. They recorded a combined net profit in 2005 for the first time in three years, thanks to a rise in credit card purchases and a fall in the delinquency ratio. Their average capital adequacy ratio rose to 19 percent at the end of 2005, thanks to higher profits and capital increases. The year 2006 is expected to see further consolidation of commercial banks and rising participation of foreign banks in the sector. A U.S.-based private equity fund is set to sell Korea Exchange Bank, and creditor banks of LG card are also set to sell their stakes, as both domestic and foreign banks have shown great interest in acquiring these financial institutions. Back to top
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