Needs to Address the Growing Uncertainty of International Investors
Keith W. Rabin
Many analysts predicted a weakening
Korean economy last year in the face of an emerging China, a slow
growing Japan and continuing market turmoil in the United States.
To the contrary, a revitalized Korea exhibited a strong performance.
It attracted substantial investor interest -- and the Korean stock
market registered one of the world’s strongest performances
during the first six months of 2002.
This achievement began to erode, however, during the latter half
of the year and has accelerated in recent months. The simple truth
is that Korea -- no matter how competitive its economy, and how
rapidly it implements reforms and expands its corporate capabilities
-- is not large enough to act as an engine of world growth by itself.
In a nation seeking to establish itself as the "Dynamic Hub
of Asia", the perceptions of foreign investors and business
executives matter more than ever before. Without them, Korea cannot
attract the physical, human and financial resources needed to position
itself as a global technology and financial center or to enable
its companies to develop the value-added strategies that are essential
to maintaining the rapid development Korea has exhibited in the
Rising tensions in the North, increased media focus on Anti-Americanism,
burgeoning consumer debt and this week's downgrade of Moody's outlook
for Korea's sovereign credit rating all contribute to a growing
discomfort among international investors and executives. Their uneasiness
is compounded by the recent election of Korean President Roh Moo-hyun,
who ran on a populist platform and is largely unknown -- not only
outside of Korea -- but also among many Korean business leaders.
The world therefore nervously watches to see whether Korea will
continue to deserve its hard-earned reputation as the Asian country
most eager to embrace reform after the IMF crisis and as a result
offered some of the world's most attractive investment and business
While Koreans tend to hunker down and turn inward when faced with
adversity that is precisely the opposite of what is necessary at
the present moment. Korean business and government leaders –
if they are to maintain the good will and positive perception they
been gained in recent years – must reach out and confront
the problems they are facing. Investors are not seeking to punish
Korea or to retreat from the peninsula. Like everyone else they
are simply seeking the reassurances they need to justify their decisions.
For example, rising tensions in the North lead Moody's this week
to change its outlook for Korea's sovereign credit rating from positive
to negative. Their belief is based on the assumption that increased
provocation by the North, which has resulted in an open resumption
of its nuclear effort, heightens South Korea's security risk and
the possibility of a military response from the United States.
This development surprised many investors and business and government
leaders. It has raised their anxiety level, particularly after several
months of media coverage depicting a growing "Anti-Americanism"in
Korea. Several U.S. government leaders have even gone so far as
to question whether it is wise to maintain American security forces
in the nation. One might rightly ask if Moody's actions and the
resulting uncertainty it created were a key factor leading to an
intra-day decline of over 6% earlier this week off the five day
KOPSI index average and whether this is a portent of things to come.
The answer largely depends on the actions of Korea's new government
and its corporate community. The U.S. until recently was perceived
as a safe haven and in many ways a beneficiary of global turmoil.
This has been changing due to U.S. economic and corporate excesses
as well as the loss of innocence following the 9/11 tragedy. As
a result, international investors and executives, who have been
enduring dramatic losses in dollar denominated assets, have by necessity
begun to regain their appreciation for greater international diversification.
This theoretically creates a great opportunity for Korea-related
projects and Korean companies who can position themselves as globally
attractive investment opportunities -- yet it will not happen by
itself. Rather than reach inward, Korea-related entities must reach
out and explain current dynamics from their own perspective in a
way that makes sense and which increases their attractiveness to
the international investment community.
Korean opinion leaders need to emphasize while recent actions by
the North are certainly important and need to be addressed, they
do not represent a fundamental change from the security dynamics
of the past fifty years. They might also point out the low historical
correlation between economic growth in South Korea and changes in
South-North relations. Furthermore, the rise in what is seen as
Anti-American sentiment in the South might be interpreted more as
the inevitable result of a young, maturing, empowered, growing democratic
economy. Korea’s rising stature and educated workforce is
giving rise to a truly dynamic human resource pool. It is seeking
greater self expression – not only in its delivery of cutting
edge products, technologies, corporate structures and a growing
range of cultural exports – but also as a nation that seeks
to independently determine its national destiny.
It is also worth noting that Korea represents an increasingly attractive
consumer market in an of itself. This has helped to give additional
depth and strength to its economy. While representing a highly positive
and important trend over the long term, Korean leaders need to acknowledge
investor concern over the rapid rise of consumer debt. Foreign media
reports highlight alarming statistics such as the record 7% rise
in the average credit card default ratio during the third quarter
of 2002. Steps that the Financial Supervisory Service has taken
to curb defaults, including the imposition of limits on cash advances
and higher reserve ratios on lending institutions receive far less
attention and need to be emphasized.
To maintain Korea’s continuing integration as a vital link
in the global chain of commerce and finance, efforts must be made
to communicate both the evolving growth of the Korean nation as
well as the workings of individual entities on the firm level. By
providing well thought out reasons why foreign investors and business
partners would be wise -- not only to maintain -- but to expand
their involvement with Korean enterprises; in addition to explaining
the factors that drive their behavior, investors will be far more
likely to understand that volatility moves in both directions.
This will help to lead them to the conclusion that current tensions
with the North and other economic problems in the face of a global
slowdown are only temporary interruptions in the long-term growth
pattern that Korea has consistently exhibited for over half a century.
Therefore, they will come to understand that any present trend downward,
which may continue in the current incendiary environment, represents
nothing more than a long term buying opportunity.
A. Kabak, C.