Major Economic Indicators

Recent Developments

• As an externally-oriented economy, South Korea is not spared from the current financial tsunami. Its GDP in the fourth quarter (Q4) of 2008 plunged by 5.6% year-on-year (YoY). But South Korea is emerging from the recession, with a GDP growth of 0.6% YoY in the third quarter of 2009.
• In response to the financial tsunami, the South Korean government has initiated several stimulus packages, including a “Green New Deal” worth 50 trillion won (US$35 billion) to be spent in four years to create jobs and push for environmentally sustainable economic growth.
• South Korea’s retail market is regaining strength. Its seasonally-adjusted retail sales index rose from 104.4 in January 2009 to 115.6 in September 2009, or a YoY growth of 6.3% in September 2009. The pick-up in retail sales was driven by durable goods, particularly auto sales.

Current Economic Situation

Domestic Economy

As an external-oriented economy, South Korea is not spared from the current financial tsunami. Its GDP in the Q4 of 2008 plunged by 5.6% year-on-year (YoY). For the whole 2008, South Korea managed a 2.2% real GDP growth.

The Korean government’s stimulus packages to cushion the effect of falling external demand include the following:

• A “Green New Deal”, worth 50 trillion won (US$35 billion) to be spent from 2009 to 2012, is aimed at creating jobs and environmentally sustainable growth. Under the plan, corporate taxes for large companies will be cut from the current 25% to 20% in 2010; while that for SMEs will be lowered from 13% now to 10% in 2010. Related measures include investment into infrastructure that will steer economic growth in an environmentally-friendly way. It is estimated that 960,000 jobs will be created over the next four years, with 140,000 alone to be created within 2009;
• 11 trillion won (US$7.8 billion) to be spent on infrastructure, and stabilisation of Koreans’ livelihood, such as support for SMEs; 
• 3 trillion won (US$2.1 billion) on tax cuts; and
• Speeding up fiscal expenditures.

With the weight of the stimulus measures together with a stabilising external environment, there are encouraging signs on the South Korean economy. After four consecutive quarters of year-on-year contraction, South Korea’s economy grew by 0.6% YoY in the third quarter of 2009.

South Korea’s retail market is also regaining strength. Its seasonally-adjusted retail sales index rose from 104.4 in January 2009 to 115.6 in September 2009, or a YoY growth of 6.3% in September 2009. The pick-up in retail sales was driven by durable goods, particularly auto sales. The seasonally-adjusted durable goods sub-index rose from 112.4 in January 2009 to a staggering 143.6 in September 2009. This may be in part due to the government’s tax incentive for South Koreans to replace their old cars with new ones. For the seasonally-adjusted semi-durable goods sub-index, which includes goods such as clothing, footwear, sports and entertainment goods, remained flat compared with a year ago.

Amidst an economic slowdown, inflation pressures continue to dissipate. Consumer price inflation rose only 2.2% YoY in August 2009, after peaking at 5.9% YoY July 2008. However, the inflation rate in August 2009 was faster than that of July, at 1.6%, reversing a 5-month decline. This indicates that the downward pressure on prices have somewhat eased.

External Trade

South Korea is one of the Asian economies with high trade dependency, with total foreign trade accounting for over 90% of the country's 2008 GDP. The performance of Korea’s economy is closely related to its export performance.

Major export items in 2008 included petroleum and related products (9.1% of total), chemicals and related products (10.1%), telecommunication equipment (11.7%), electrical machinery (11.7%), road vehicles (11.4%), and other transportation equipment (such as ships, 10% of total).

In 2008, major destinations for South Korean products included the Chinese mainland (21.7%), the US (11%), Japan (6.7%), Hong Kong (4.7%), and Singapore (3.9%).

As South Korea’s exports are mainly high-value items, they are more susceptible to economic downturns. Destocking activities in late 2008 caused South Korean exports to plunge. The worst performance of South Korean exports occurred in January 2009, when exports declined 34.5% YoY.

However, South Korea’s exports have improved in recent months. In October 2009, the fall in South Korea’s exports moderated to only 8.3% YoY, compared with double-digit declines seen in earlier the year. South Korea’s exports were helped by robust demand of the Chinese mainland, its largest export destination, as well as a weaker currency compared with a year ago. In September 2009, South Korea’s exports to the Chinese mainland pulled out of the negative territory and managed a YoY growth of 3.5%. As the world economy is on track to recovery, South Korea’s exports are expected to improve in 2010.

South Korean imports are still considerably weak. In October 2009, South Korean imports dropped by 16.3% YoY, contrasting with a more moderate drop in exports (-8.3% YoY) for the same month. However, this is already an improvement from the over-30% YoY contraction since the beginning of 2009. In September 2009, imports dropped by 24.6% YoY, following a 32.2% YoY drop in August 2009 and marking a slower pace of import declines. While South Korea’s economy is recovering, imports are expected to revive as consumer spending picks up.

In 2008, South Korea’s chief imports included: petroleum and related products (24.1% of total), electrical machinery (11.2%), chemicals and related products (8.4%), and iron and steel (7.7%). Major sources for South Korea included the Chinese mainland (17.7%), Japan (14%), and the US (8.8%).

Foreign Direct Investment

In 2008, total FDI in South Korea amounted to US$11.7 billion. In the first three quarters of 2009, FDI in South Korea reached US$8 billion, up 8.1% YoY. While investment from the Americas and Africa dropped by 28.2% and 39% YoY respectively in the first three quarters in 2009, investment from Asia, Europe, and the Middle East increased YoY, at 29%, 8% and 102% respectively.

Trade Policy

In the past, South Korea's trade policy placed heavy emphasis on import control and export growth promotion. South Korea has revised its trade policy to a more neutral stance in recent years, which includes, amongst other things, reaching Free Trade Agreements (FTAs) with other countries. In addition to the existing FTAs with Chile, Singapore and the European Free Trade Association (Switzerland, Norway, Iceland and Lichtenstein), South Korea reached an FTA with ASEAN in November 2007. South Korea concluded an FTA with the EU in October 2009, which is expected to be formally signed in the first quarter of 2010. It is also pursuing FTAs with countries like Japan, Canada, and India. After conclusion of the US-Korea FTA, which is still subject to parliamentary ratification, there have been voices in both countries over re-negotiating details of the FTA.

In 1997, following the amendment of the Customs Act and its Enforcement Decree, South Korea simplified import procedures and required documentation. Most goods can now be imported without licences, except items restricted for health or security reasons. All of Hong Kong's leading export products can be freely imported into South Korea.

For tariffs, most goods are charged at 8% in contrast with 24% in 1983. Tariff rates for leading export items from Hong Kong range between 0% and 13%.

Pursuant to the Information Technology Agreement (WTO-ITA), Korea has reduced tariffs on some 200 types of telecommunication and information related equipment to zero. Beginning from 1 July 2002, tariffs on 290 selected import items used for research and development activities, like digital projectors, fuel injection gadgets and motion picture servers, are reduced to 1.6% from 8%.

In spite of the aforementioned changes, the South Korean government still maintains a safeguard mechanism that allows the temporary tariff imposition to discourage imports. Nevertheless, the number of items subject to the "readjustment tariffs" has been reduced to about 20 since 2002. Export items from Hong Kong are not subject to the readjustment tariffs.

In addition to tariffs, imports are also subject to other taxes, including a value-added tax (VAT). The VAT rate on imports is 10% of the CIF value plus customs levies. In addition, a special excise tax, which ranges from 7% to 20%, is levied on certain luxury and durable consumer items such as jewellery, motorboats, fur, slot machines, whether imported or locally manufactured. The special excise tax on home appliance, however, was eliminated in late 1999.

Hong Kong's Trade with South Korea

South Korea is the 8th largest export market and the 6th largest import source of Hong Kong. In line with global trade contraction, Hong Kong's total exports to South Korea were down 20.2% YoY to US$3,974 million in the first three quarters of 2009. During the period, Hong Kong ran a trade deficit against South Korea amounting to over US$5.1 billion. Imports by Hong Kong decreased by 23.4% YoY to US$9,100 million.

Major Hong Kong exports to South Korea in the first nine months of 2009 included: semiconductors, electronic valves and tubes (US$828 million, 20.8% of total, -26.5% YoY), telecommunications equipment and parts (US$676 million, 17% of total, -31.3% YoY), and travel goods and handbags (US$326 million, 8.2% of total, +24.6% YoY).

On the other hand, Hong Kong mainly imported the following from South Korea in the same period: semiconductors, electronic valves and tubes (US$3,085 million, 33.9% of total, -12.3% YoY), petroleum oils (other than crude) (US$1,087 million, 11.9% of total, -54% YoY), and telecommunications equipment and parts (US$937 million, 10.3% of total, -22.2% YoY).

South Korea's Economic Involvement in Hong Kong

South Korea is very involved in the Hong Kong economy. Korean companies had established 18 regional headquarters, and 44 regional offices in Hong Kong as of June 2009. In total, there are more than 650 Korean companies operating locally in Hong Kong. The number of Koreans residing in Hong Kong amounted to over 4,500 at the end of 2008. Korean companies in Hong Kong are involved in financial services (Korea Exchange Bank, Woori Bank, and Hana Bank, etc), logistics and transportations (Hanjin Shipping, Hyundai Merchant Marine, and Korea Travel Service, etc.), and cosmetics (Laneige, Sulwhasoo, etc.), among others.

Owing to the financial tsunami, South Korean visitors to Hong Kong dropped by 36.2% YoY to 461,022 in the first nine months of 2009. But in 2008, South Korean visitors to Hong Kong amounted to 0.94 million (up 3.2% from 2007), accounting for about 3% of Hong Kong's inbound visitors for that period.