(This article originally appeared in Korean in the Maeil Business News on March 17, 2003. To read it in the original KOREAN, please CLICK HERE)

Korea Needs to Address the Growing Uncertainty of International Investors

By 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 past.

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 opportunities.

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.

Keith W. Rabin serves as president of KWR International, Inc. KWR International is a consulting firm specializing in the delivery of research, public/investor relations and advisory services, with a particular emphasis on Korea and the Asia Pacific region. He can be reached at krabin@kwrintl.com.