KOREA'S ECONOMIC CRISIS:
East West Consulting
2nd Fl. Hanil Bldg, Dogok-Dong, Kangnam Ku Seoul, Korea 135-280
Tel: (82) 02-579-9550
Fax: (82) 02-529-7561
1. Current Economic Movement
WHAT DOES IT MEAN FOR U.S. BUSINESS
Over the medium and long term, the Korean economy should emerge stronger than ever as a result of
changes occurring under the IMF program in Korea. This will be good news for U.S. business, which
has extensive trading and investment relations with Korean business. However, in the short term, the
ramifications of the economic crisis for American business are less clear, though it appears likely
that there will be both opportunities and difficulties. Following is information gathered from trade
associations, U.S. businesses, and Korean importers - all of which provide some guidance for U.S. firms
in their continued dealings with Korea.
With the continuing instability of the won and the lack of trade financing throughout the economy,
U.S. companies are experiencing delays in receiving payments from Korean importers. Some of those
delays are also coming from Korean government agencies and banks, which, like everyone else, are
delaying payment in the hopes that the won to dollar rate will return to more normal levels. These
delays are occurring despite the terms of contracts and LCs, because credit is not available at this
time to fulfill commitments made even a month ago.
In the case of new imports, Letters of Credit simply are not available for the moment from either
Korean or foreign banks in Seoul, making it impossible for importers to provide guaranteed methods of
payment to American exporters. While our advice has been to use not only LCs, but confirmed LCs, this
is clearly not possible for the time being. To illustrate, the Korea International Trade Association
reports that as of December 23, Korean banks were refusing 70.1 percent of all LC requests, with 100
percent denial in the consumer products area. Banks were also refusing to negotiate export documents
in 63.6 percent of the cases. If the exchange market and financial situation stabilize over the next few
weeks, it may be possible to request confirmed LCs once again. In the meantime, U.S. exporters should
be extremely cautious about extending credit on open account or time drafts, since the ability of Korean
business, of all sizes, to pay is uncertain because of the credit crunch.
There are dollars available among importers, some of whom hold accounts offshore or dollars outside the normal
banking system. However, at this time, it is difficult for importers to utilize these dollars without
drawing attention to themselves. In addition, given the volatility of the exchange rate, importers tell
us that they are losing money on every sale, since replacement inventory will cost more than inventory
now in place. Therefore, in the very short term, importers are reluctant to push sales until the won/dollar
During the recent visit of the Pennsylvania trade mission of 15 small and medium sized business in the high
tech and environmental fields, we encountered considerable difficulty in recruiting Korean companies for
meetings. In the end, we had over 100 appointments with no cancellations, and several PA companies have or
are close to signing deals. So the business is there, but it is much harder to effect than before.
In trying to execute Agent Distributor Searches and Gold Keys, our Korean contacts are saying that this
is a bad time. They ask that we hold off 2-3 months until the economic situation is clearer. Our local
calls to trade specialists are down 70-80 percent the past two weeks, which probably reflects the worst
of the situation as the crisis deepened in the run-up to the Presidential elections on December 18.
As we weigh our trade event schedule over the next year, we are currently advising U.S. firms that they
will need to stay engaged in the Korean marketplace, in anticipation of a much stronger economy emerging
over the next 1-2 years. So far, nearly all of our Study USA exhibitors for the March show remain committed
to participating. Since the won/dollar rate may end up much more favorable than anticipated, it will
be cheaper for American firms to participate in trade shows than before, easing somewhat the decision to
We are seeing a number of stateside and local American visitors who want to discuss their particular projects
underway in Korea. One large hotel group has expressed concern about a major project underway, as have a
number of defense contractors. At this time, it’s just too early to judge which projects are likely
to move forward and which will not. Obviously, those involving large Korean companies are subject to
reduced investment plans of 30 percent or more being announced by all the major players here. That still
leaves a number of projects which will move forward over the coming year.
Though we expect to see a severe cutback in construction, including that related to SOC projects, the Ministry
of Construction and Transportation (MOCT) forecast that the impact on imports of architectural /engineering
/design and construction /management / supervision will be minimal. MOCT officials reason that there will
be ongoing requirements for high quality services and expert technology by domestic firms. They note also
that local firms will be seeking joint ventures or consortia for their projects in Korea and overseas, in
order to obtain additional sources of financing and to enhance credibility with foreign governments.
While there will certainly be a slowdown in U.S. exports of capital equipment and luxury goods, it is
important to remember that much of what Korea exports consists of raw materials and semi-processed goods.
With the won devaluation, Korean exports should boom next year, boding well for a continuation of a
large portion of imports from the United States. Sectors which reportedly will do well include automobiles,
semi-conductors, ship building, petrochemicals, computers, and telecommunications. Sectors not expected to
benefit as much from exports, partly because of a weakening prices in the world market or slumping demand
in the domestic market, include steel, machine tools, home electronics, construction, and textiles.
Likewise, as Korean conglomerates (chaebol) restructure and refocus, technology transfer will be extremely
important. Korean companies will continue to need the latest technology in order to move up the value-added
chain, much of which can come from the United States. Of course, technology with favorable financing terms
will be critical to such sales.
Real estate companies, including foreign franchisees, are bullish on the prospects for business. They reason
that the chaebols are putting prime real estate on the market for sale in order to generate cash flow and
rents for prime locations should drop. They also expect the government to make it easier for foreign
investors to acquire land, and adding impetus to the market.
Law firms and those firms specializing in mergers and acquisitions (M and A’s) also see prospects for
increased business. They expect that as the government eases the rules for friendly M and A’s, and considers
allowing hostile M and A’s, a number of firm companies will show increased interest in investing in Korea.
The financial area may present the most opportunity to foreign firms. In recent days, the Korean government
has greatly liberalized the financial sector, from the bond and stock markets to the banking sector where
foreign firms may now be able to acquire local bank operations. These changes are taking place way ahead
of commitments made by Korea to the OECD or in the WTO and are likely to change the face of doing business
in Korea. U.S. banks, insurance companies, funs, and investment houses will have major new opportunities
to explore once the current crisis stabilizes. Korea seems to be undergoing a similar sea change in the
foreign investment field - not only in permitting M and A’s, as mentioned above, but in welcoming foreign
investment in a way never seen before in Korea. With a number of American firms successfully manufacturing
already in Korea, we may see considerable expansion over the next couple of years. We are already seeing
interest reported in the press by P and G, Bowater, and Dow Corning among others.
Extracted this from the information written by the U.S. Embassy in Seoul, Korea.
2. Fluctuation of Exchange Rate and Stock Market during March, 1998