Major surgery on the cards in Korea

IFR Asia 913 - October 3, 2015
6 min read
Asia

South Korea’s economy, once the standard bearer of Asia’s ambitions to move from emerging to fully developed nation status is in dire straits. Well, perhaps not quite, given that the country’s GDP is still growing. But in relation to the past 20-odd years, the sub 4% growth South Korea has registered over the past four years – it came in at a paltry plus 0.3% in the second quarter on a year-on-year basis – is calamitous.

President Park Geun Hye, anxious to leave a strong legacy as she faces the final half of her five-year term, has described South Korea’s economy as in need of “major surgery”. The lady’s right, but I wonder if that strictly curtailed presidential term might partly be to blame.

The Philippines has it too, restricting a president to just six years, with both term limits imposed to limit presidential powers after the turbulent dictatorial legacies left by Ferdinand Marcos in the Philippines and, as it happens, by Ms Park’s father Park Chung-hee in South Korea.

It might just be that presidents in these countries become the proverbial bull in a china shop (maybe not the most apposite turn of phrase, but I’m sticking with it) in order to achieve rapid results in their country’s GDP rates.

The jury’s still out on whether Benigno Aquino, the Philippines current president, has made a difference or whether the strong GDP growth rates achieved by the Philippines under his watch were the result of window dressing or good fortune based on recovering demand in the countries where the Philippines’ vast offshore worker contingent is based.

In July in his State of the Union address, Aquino called for an end to the dynastic politics that are seemingly built into the Philippines’ DNA, even mooting a law limiting the numbers of members of influential families who can run for public office. He wants the country, at least in terms of business and politics to become, well, less Filipino.

By contrast, Ms Park, at least as far as business is concerned, wants South Korea to become more Korean.

WHAT DO I mean by that? Well, let’s take the stricken South Korean construction industry as an example. That sector has been hit over the past four years by a double whammy: a moribund domestic property market, which has prompted a cash crunch so severe that at one point almost two dozen South Korean developers were undergoing debt restructuring or had filed for protection from creditors; and massive losses on overseas construction projects.

Of course, the current President Park was not responsible for either of these states of affairs. But arguably on the domestic property front she got the joke too late and did next to nothing earlier on in her term to address woes in the local property market.

Meanwhile, the government rang in 2015 with an explicit target for South Korean developers: to win US$70bn worth of contracts through overseas construction this year. At least her administration were aware of the rising costs that have plagued the South Korean offshore construction industry – the annual target quota during the global financial crisis was US$40bn of contracts to be won.

The fact is, the government has no business in setting quotas for its homegrown companies, particularly in an arena as risky as international construction projects. For one thing, that business is asking for trouble if you have a free floating currency as does South Korea. All the more so if you found yourself caught with no alternative but to seek sustained depreciation thanks the economic policies of the region’s biggest economy.

THAT IS WHERE South Korea finds itself on the Korean Won, courtesy of Japanese prime minister Shinzo Abe and his “Abenomics” programme aimed at reviving Japan’s economic fortunes based on the central policy plank of engineering a sustained depreciation of the yen. Yes as a government you have some control over the effective exchange rate of the currency you issue. But you can’t control all the inputs.

And President Park should have looked at the super aggressive approach of South Korean construction firms during the years of the global financial crisis, when their order books were bulging on the back of price undercutting that sent shockwaves through the global project finance industry.

Sure you may want to finesse a bit in the tens of millions of dollars on a project in the US$1bn ballpark. But not by US$100m, as one South Korean developer did on a Middle East refining contract that is now generating big losses. That kind of swaggering, cowboy approach to business should be halted by the South Korean government. Scrapping annual quotas would be a good start.

The approach mirrors that seen in international banking where governments have moved to ring-fence the domestic operations of banks looking to aggressively expand over the domestic market in order to protect their home grown depositor base.

But perhaps President Park is beginning to take a new broom to the South Korean way of doing international business.

The government recently enacted a “U-Turn” law that will offer special incentives to big internationally focused South Korean companies that bring the base of their operations and revenue generation back home. Not the South Korea we’ve grown used to in recent decades.

These steps are absolutely heading in the right direction. Whether Ms Park will have the time to see them through, however, is another question.

Jonathan Rogers_ifraweb