Korea leads Asia's recovery

Optimism is growing for Korea's recovery from a sharp slowdown in the wake of the worldwide financial crisis and recession, largely thanks to the government-led stimulus measures and aggressive interest rate cuts by the central bank. Indeed, Asia's fourth-largest economy has impressed many investors by its surprising rebound, especially compared with its regional peers.

"We think the consensus has consolidated behind the view that Korea's is the strongest economic recovery in Asia ex-China," said Tim Condon, ING chief economist for Asia.

On September 15, Moody's Investors Service said that due to the government's willingness and ability to support the banking system against external exposure and to implement a timely fiscal stimulus programme, "Korea's sovereign credit fundamentals have proven resilient to the global recession and have maintained a stable A2 ratings outlook throughout the credit crisis".

The authorities set aside $55 billion in foreign exchange reserves to provide swaps or loans to banks and the central bank has reduced interest rates by 3.25 percentage points since October 2008. Further, they established a bank recapitalisation fund and a toxic asset fund to shield the banking sector from the downturn and prevent major deleveraging.

Steven Lim, J.P. Morgan's Korea chief executive officer, attributed Korea's performance to pre-emptive actions by the government, strong corporate earnings that have been the reward for consistent investment to produce high quality goods at competitive prices supported by increasing brand recognition, and by the commensurate difficulties currently experienced by US and European companies.

Korea will probably post a record trade surplus of $40 billion this year, said the ministry of knowledge economy on October 1, as imports have fallen further than exports. And the decline in exports is slowing due to more demand for cars and semiconductors.

The government had enacted a stimulus package equivalent to 3.6% of GDP and provided quasi-fiscal support for ailing small and medium-sized enterprises, especially in the form of credit guarantees.

The large fiscal stimulus programme has helped to support domestic demand and should minimise the contraction in economic growth this year. Moody's expects growth to recover to 3% in 2010, with medium-term growth estimated at 4% to 5%.

Government spending 

The 2010 budget plan proposed on September 28 reaffirms the government's expansionary fiscal and monetary stance until the economy is on a firmer path to recovery. The government proposes a 2.5% increase in budget spending for next year, which it will use to bolster the economy and strengthen the nation's health and welfare system. The proposal is predicated on official assumptions that Korea's economy will expand 4% in 2010 after contracting 1.5% this year.

Under the plan it wants to spend W291.8 trillion ($246 billion) next year, compared with W284.5 trillion set aside for 2009. "We will maintain active fiscal measures to reinvigorate the local economy next year," finance minister Yoon Jeung-hyun told reporters at a press conference in late September.

The budget increase comes as the economy seems to be staging a faster-than-expected  rebound from a steep downturn caused by the financial turbulence and resulting global recession last year.

But, "the crisis is not over yet," Yoon warned. Until then, the government will prioritise "laying the firmer ground for an economic recovery and keep supporting projects for the post-crisis era".