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  Korea Report - November 2003
  Author : Hwang & Co     Date : 03-12-19 16:04     Hit : 37599    
* Topics

- Prosecution expanded its investigation on illegal political funds into more than 17 chaebols.
- Parliament passed a bill for independent counsel on corruption allegation involving President Roh's aides, and President vetoed.
- Korea and USA failed to narrow the difference on the troops dispatch to Iraq.
- Korea's trade surplus posted historical high.
- Foreign investment on Korean financial sector revived.
- Late Chung MH's widow and his uncle battled to take over the control of Hyundai Group.
- KWon continued its decline against USDollar.
- Government is to adopt a "Volume incentive system" for foreign transshipment cargo.

* Government & Society

The prosecution decided to expand its investigation beyond SK Group to all other conglomerates, including Samsung, LG, Hyundai Motor, Lotte and Doosan groups, alleged to have delivered large sum of illegal money to the camps of presidential campaign, banning more than 20 executives of major conglomerates from leaving the country as it prepared to summon them for questioning. 12 other groups, including Tongyang, Samyang, Dongbu and Poongsan Groups are also to be investigated. Prosecutors raided the office of Samsung Electro-Mechanics and its parts supplier, Dongyang Electronics, to confiscate accounting books and other corporate documents for their investigation over the suspicion of stashing away slush funds by inflating the amount of deals with its parts supplier, and subsequently delivering the money to major political parties. Prosecutors raided the main office of Hyundai Capital Service to seize accounting records and other corporate documents for the same allegation.

The prosecution is to investigate all politicians involved in collecting funds from corporations during last years presidential campaign, indicating that some of them embezzled part of the money for their own personal use. Conflict among political parties over the slush fund has been deteriorated, as rivals tried to outdo each other in demonstrating who is the least corrupt group ahead of April general election next year and who is to take better measures in its drive to reform the politics..

The National Assembly passed a bill authorizing an investigation by independent counsel into the corruption allegations involving President Roh's aides. 183 out of total 272 legislature members, voted for the bill. President Roh Moo-hyun vetoed the bill, citing that it violates the division of power. The 3 opposition parties reacted angrily to Roh's veto, denouncing it as an act of "anti parliament democracy", threatening to wage all out struggle against President, including impeachment.

The pro government Uri-Party officially launched, becoming 3rd largest parliamentary bloc with 47 seats in Parliament nearly 2 months after a band of MDP law makers loyal to President Roh left MDP. Currently main opposition GNP holds 149 seats and MDP has 61. It called for President to join the party before the general election in next April, and decided to persuade President to drop his earlier proposal for referendum, by seeking cooperation from opposition parties.

Government vowed to sternly deal with all illegal demonstrations and bring them to justice without exception or compromise, in the wake of massive rallies to protest the government's trade and labor policy, as well as a nuclear dump site project. 113 union members were taken to police stations after throwing stones and firebombs in the most violent demonstration in 2 years. Police detained more than 100 people in some 70,000 farmers from across the country to condemn FTA with Chile. Labor Ministry reported that year 2003 would be recorded as a time marred by worst labor discontent since 1990. The number of labor dispute has topped 305 sofar this year, involving a record number of 131,500 workers and losing 1.3 mil working days.

* North Korea & National Defense

There have been diverging views on the cost of reunification of Korean Peninsula. S&P called the collapse of NK regime for the biggest threat to SK's sovereign rating, currently at "A-", unless South builds up significant fiscal reserves. On the other hand, Barclay Capital noted that sudden collapse of NK needs not spell fiscal disaster for SK. Taking as an example, West German's unification costs peaked at around 55% of East German's GDP. 55% of NK's GDP accounts at around $19.4 bil, representing only 2.2% of SK's GDP.

Korea and USA held a series of meeting in Washington and Seoul to draw up the details of Seoul's planned deployment of troops to Iraq, including the number and function of the troops, but failed to narrow their difference on the issue. USA reportedly asked Korea for more than 5,000 combat troops who are capable of conducting independent operation to maintain security, while Korea is to concentrate merely on rehabilitation and other humanitarian projects.

A group of law makers from major political parties joined the voices to oppose the nation's possible dispatch of combat troops to Iraq, saying that there is no reason for Korea to send combatants in the war which is criticized even inside USA, while government worries that its reluctance to commit on the issue may damage the alliance between Korea and USA.

* Economy & Policy

Korea's economy seems to be escaped from recession with GDP growth rate of 1.1% on quarter in the third quarter, after contracting 2 straight quarters, on the back of brisk exports, but growth remain weak amid ebbing private consumption and investment. IMF forecasted that Korea's economy would expand at annual rate of 4.75% next year and 5.5% in 2005, on the back of improvement of global market and strengthened domestic demand, after gaining 2.5% this year.

Government is to invest KW1.6 tril by 2012 to develop the bio industry to lead nation's post IT era, KW408 bil in developing core parts used in IT products through 2007, KW1 tril in R&D of next generation semiconductors over coming 5 years, and KW203.6 bil on the development of advanced mobile telematic systems by 2008.

Korea's trade surplus in Nov reached $2.87 bil, the highest since Dec 98 and 7th consecutive month's surpluses, thanks to brisk exports of cars and semiconductor products, on the export of $18.62 bil, up 22.5% on year. Korea expects its trade surplus this year to reach $15 bil, a 46% rise on year.

Korea's exports to Asian countries jumped to $75 bil in first 10 months this year, an all-time high accounting for a record 50.9% of nation's aggregate exports of $147.3 bil, mainly from surging China-bound shipment. Korea's dependence on key 5 products, such as semi-conductors, wireless telecommunication equipment, auto mobiles, computers and marine products and parts, becoming worsened, making up 42.9% of all exports in the first 10 months of this year.

WTO has ruled that the US moves on both steel duties and the export tax break systems are illegal, in favor of complaints by EU and 7 other countries over the extra duties on imported steel introduced by USA in March last year. Korean government is to officially demand USA to remove duties on Korean made steel imports. China, EU and Norway threatened USA to impose retaliation tariffs on American products if USA fails to abide by WTO's ruling.

Hynix Semiconductors, world third largest memory chip maker, has filed a petition with Court of First Instance, protesting punitive tariffs imposed on its chips by EU.

Russia Petroleum signed a feasibility study agreement with its partners China National Petroleum Corp and KOGAS, giving the initial go ahead for a giant $17 bil project to supply Siberian gas to China and South Korean market from one of the world's largest undeveloped gas field. The 4,887 km pipeline would transport gas from Kovytka gas field to SKorea through China and Yellow Sea.

Foreign interest in Korean financial sectors has been revived, on the back of improving health of local banks and the promising outlook for consumer lending. HSBC, Standard Chartered Bank, Citibank and Tamasek Holdings were reported to have submitted bid to buy the 36.6% stake in Koram Bank, which is currently held by Carlyle-JP Morgan consortium. HSBC is also talking to buy Newbridge Capital's 49.9% stake in Korea First Bank. Prudential agreed to buy 80% stake in unlisted 2 troubled money management units of Hyundai Group, such as Hyundai Investment and Securities, and Hyundai Investment Trust Management for KW500-700 bil over next 3 years. Government promised to get rid of bad loans by injecting public funds of upto KW2.5 tril.

Korean consumer defaults accelerated to a new high in Oct, leaving about 3.6 mil people behind on their credit payments. About 40% of household found hard to pay off their debts, bringing the bad debt problems to unmanageable levels and setting off alarms about a possible credit crisis. The credit card issuers, who are struggling to cope with an increasing consumer debt defaults. Barclays Capital claimed that the current situation seems reminiscent of early SK Global days, when the illicit book keeping scandal of the company forced local lenders to reserve massive provisions.

LG Card, with some 14 mil members, has once suspended its cash advance service, due to temporary liquidity shortage with a cumulative loss of more than KW4 tril, because of huge amount of unpaid card bills. Creditors of the company requested Group Chairman to offer a personal payment guarantee for the loan as well as his 5.46% and his associated stake in LG Corp, the group's holding company, virtually asking him to surrender his controlling right of the group, in return of providing KW2 tril in new loan. LG Credit Card barely escaped from insolvency with the provision of creditors' fresh loan of KW2 tril, on the collateral of only chairman's stake under the pressure from government.

KEB's board approved a plan for a $140 mil takeover bid of its cash strapped credit card affiliate, in a last ditch effort to end a liquidity crisis.

* Chaebol

Korea's business circles accept prosecutors' extensive inquiry with emotion of "hope and dread". They hope it would make the whole political funding system transparent, ending the "window dressing" which has been common accounting practice among corporations to cover up political funding activities, however, they fear at the same time it would create uncontrollable havoc, opening the "Pandora Box", shattering fragile economic recovery, and weakening business confidence.

IT industry expects exports of its goods in 2003 to exceed its full yearly target of $55 bil, led by robust shipment of mobile handset and semi conductors, compared with last year's export of $46.05 bil. The galloping development of local IT industry has continuously increased its share in the nation's GDP to hit 17.4%.

Korea's telecom industry undergoes a wave of restructuring and job cut in an attempt to stay competitive. Hanaro Telecom, the second largest broad band carrier, asked its 51 executives to submit early retirement application letter, after New Bridge Capital/AIG consortium took over the company. KTF Corp, the second largest mobile carrier, is to cut 10% of its workforce, after its third quarter net income went down 21.5% on year to KW104 bil. Earlier in Oct, KT, the largest fixed line carrier, slimmed down its organization drastically, cutting its workforce by 12.6%.

Samsung Electronics was ranked as second biggest handset vendor in Asia-Pacific region, excluding Japan, accounting for 15.7% of total sale in the second quarter, for the first time out-selling Motorola. Nokia continued to be the market leader with a 31.5% share. SEC ranked among top IT companies in global market in terms of key barometers of financial health, with annual turnover of $36.4 bil and free cash flow of $2.3 bil. SEC ranked top in the market of the flesh memory chips first time in its history, with the sale of $615 mil for the market share of 20.2% in third quarter this year, outposting Intel into 4th place.

LG Group becomes second largest chaebols in Korea with combined market value of KW23.4 tril in Nov, 32% increase from the beginning of this year, overtaking SK Group of KW21.4 tril market capitalization.

SK Corp, Korea's biggest oil refiner, recorded the third quarter profit at KW10.5 bil, plunged 90%, after it set aside more money for losses from its troubled affiliate SK Networks, former SK Global.

BP plc signed preliminary agreement for new shares of SK Power which is 100% owned by SK Corp and plans to build a power generator. AIG and New Bridge Capital completed their purchase of a controlling stake in Hanaro Telecom, Korea's second largest high speed internet provider, after paying KW585 bil.

The battle between the uncle and his nephew's widow to take over the control of Hyundai Elevator, the virtual holding company of Hyundai Group, became uglier and more complicated. Since the widow of the late group chairman Chung Mong-hun assumed the office as chairwoman of the company in Oct, with her own 18.57% stake, Chung Sang-yung, the uncle of her deceased husband and honorary chairman of KCC, have increased his controlling stake upto around 50% in Hyundai Elevator and virtually Hyundai Group has fallen into his hands. Fair Trade Commission reviewed KCC's purchase of the shares, to examine that KCC allegedly violated a public disclosure rule that requires share holder with the stake of 5% or more to make the fact public within 5 days after the acquisition. If it turned out that he violated the rule, his voting right could be restricted. He is also underfire of moral questions for taking advantage the group's trouble to take over, snatching the control of the group from the widow of his nephew, while she was still in the mourning period. In a clear attempt to maintain its control over the Group by foiling a hostile take over attempt by KCC, Hyundai Elevator declared to offer 10 mil new shares, on top of existing 5.61 mil, for sale to the public. If the capital increase turns out successful, the combined stakes of KCC and its chairman would fall below 20%. A legal battle between Hyundai Elevator and KCC seems to get into full swing in Dec.

Hyundai Motor expects its car exports exceed I mil units and value of its total exports exceed $10 bil this year. Hyundai Construction has won shareholders' approval for a plan to cancel 89% of its shares next month to improve its financial status. Iraq's interim government vowed to pay off 12 year old outstanding debts estimated at $1.14 bil to Hyundai Construction

* Monetary & Economic Indices

Korean stock prices index started the month at 782, climbed to 805, highest in almost 16 months on the back of surging exports, plunged together with other Asian market to 787 on the news of terrorist threat to attack Korea and Japan, surged again to the 17 months high at 813, then plunged across the board pushing indexs to 2 month lows at 753 after prosecution raided the office of a unit of LG and Samsung Group, and stabilized at the end of the month at 796 on the news of healthy US economy.

KWon value continued its steep declines against USDollar in the box of 1183-1171- 1202. Korea's foreign exchange reserve jumped to the historically high at $150.3 bil, with unprecedented high monthly rise of $7.02 bil in Nov.

Yield on 3 years corp bonds has been in the range of 5.38-5.49-5.68-5.45-5.6% through the month. Consumer price in Nov posted 3.6% on year and dropped by 0.18% on month, first contraction in 4 months.

* Shipbuilding & Shipping

HHI made an agreement with HMM to build 2 x 309K VLCC, Unique Shipping 1+1 x 82K LPG, Costamare 3 x 8200 TEU and Maersk Sealand 4 x 4300 TEU. HHI reported only KW3.8 bil of net profit in the third quarter, an 85% drop on year, because of losses from its offshore projects. Its offshore operation accounts about 12% of its total sales. HHI plans to use its offshore plant construction site for the ship building purpose, which will fabricates complete ship on land, then skidding to the barge that will launch the ship by submerging itself in the water. It claims that such method will shorten building period and improve the safety of the work, however, it needs some sincere explanation on the expansion of shipbuilding facilities, which is already overcapacity eating all the profit that yards deserve to enjoy. HMD secured order from Rickmers with 6 x 3500 TEU and Vroon 2 x 46K PC.

DSME agreed with Angelicoussis to build 1 x 145K LNG carrier, ExxonMobile 1 x offshore plant and Dreyfus 2 x 170K DH bulker. DSME posted its net income of KW117.4 bil in third quarter, from KW51.7 bil a year earlier, on the sale of KW1.57 tril, reflecting gains from building high valued vessels, and dropping its debt ratio to 151% from 182.9% last year. Daewoo Mangalia Shipyard became an outpost for DSME's Europe operation. DSME has invested around $30 mil into the yard and carried out on-the-job training for the 1800 local workers in its Okpo yard making them key staffs of Mangalia yard. It has earned net profit of $2.5 mil in 99 and expect $10 mil this year, securing workload upto the end 2005.

SHI signed the contract with Seaspan for 4+4 x 9600 TEU and Viken Shipping 2 x 151K tanker. SHI recorded the net profit of KW53.3 bil in 3rd quarter, 95% up on year, on the sale of KW995.3 bil, 0.6% down.

Hanjin Heavy returned to normal operation, ending 117 days of strike, 30 days after the suicide of labor leader in its premises. Hanjin ordered a unit of 3,000 tons class floating crane, which will be used for construction of container ship, to IHI for the delivery of end 2004. STX agreed with Hansa Treuhand to build 2 x 2800 TEU container carrier. A Korean rating service firm upgraded the STX credit ratings from BB+ to BBB-, and corporate bond from B+ to A3-. Samho Heavy made a contract with Schoeller for 2 x 12.4K IMO II III chemical carrier.

Government plans to adopt a "volume incentive system" in Dec to attract foreign shippers to Busan and Kwangyang ports. High volume shippers will be offered upto 50% discount to their transshipment cargo handling fees.

HMM kept its position as the largest tanker operator in Korea, by ordering 2 units of VLCC, maintaining the fleet with 13 VLCC, 1 Aframax, and 4 handy size PC, in addition to 5 units of 6800 TEU container carriers. HMM has recorded the net profit of KW12.9 bil and reduced its debt ratio from 1300% level to around 320%, completely solving the liquidity problem. Hanjin Shipping and HMM ranked 2nd and 5th in container transportation in USA-Asian route, with 320,079 TEU and 208,487 TEU, respectively, while Maersk Sealand hold fast No1 position with 421,406 TEU.

Best Regards,