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  Korea Report - October 2018
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KOREA REPORT - OCTOBER, 2018.

President Moon¡¯s nine-day trip to Europe scored a little-success, where he had two major diplomatic objectives, arranging a visit to NK by Pope Francis and persuading European leaders to ease sanctions on North. Moon¡¯s visit to five European capitals had been arranged in time for the biennial Asia-Europe Meeting that brought together 21 Asian and 30 European leaders to Brussels. He also visited Copenhagen to attend the inaugural meeting of the Partnering for Green Growth and the Global Goals 2030 and the Paris Climate Agreement. On the sidelines of the two multilateral meetings, Moon held bilateral talks with British PM Theresa May, German Chancellor Angela Merkel, Thai PM Prayut Chan-o-cha and EC President Jean-Claude Juncker. He also visited the Vatican and France. But Moon failed to win the blessing from European leaders for his call for sanctions relief on the North. In his meetings with French President Emmanuel Macron and British PM Theresa May, Moon sought to enlist their support for his call for easing sanctions on the North, which he said was necessary to provide assurances that NK has made the right choice to denuclearize and encourage NK to speed up the process. But Macron emphasized a complete, verifiable and irreversible denuclearization and May also urged Pyongyang to prove its commitment to complete denuclearization with more concrete action.

Concerns over the inter-Korean military agreement adopted in Pyongyang on Sept 19 have not eased much. The clause to establish a no-fly zone is probably the most risky. Due to the zone over the military demarcation line, unmanned aerial vehicles that SKorea planned to deploy will become useless. Their detection distance is a few km, while the zone stretches 10-15 kms from the line in either a southern or northern direction. Drones capable of reconnaissance from outside the zone, ultrahigh-altitude reconnaissance aircraft and artificial satellites can still watch the NKorean long-range artillery near the line, but these are American assets. Securing transparency of military activities through verification is the basis of trust, and is indispensable about a surprise attack. Ultrahigh-altitude reconnaissance can be carried out by the US, but scanning NKorean troops from the front line is a job the SKorean military has to do. The zone will effectively blind frontline units and undermine their attempts at verification as well.

SKorea and the US are falling for NKorean leader Kim Jong-un¡¯s ¡°tricks,¡± Bruce Klingner, senior fellow at Heritage Foundation said. His warning comes amid concerns over SKorea¡¯s efforts to expand cross-border exchanges at a time when NK-US talks aimed at moving forward on the denuclearization of the Korean Peninsula appear to be at a standstill. ¡°The US continues to have a smile publicly on its face, but in my discussion with US officials, they are very, very concerned or even angry about President Moon¡¯s NK policies. Washington has sent a number of very strong messages to the Moon administration to slow down,¡± the former CIA deputy division chief for Korea said. SKorea¡¯s request for exemptions to the UN and US sanctions also raised alarm bells in Washington, undermining the US-led pressure campaign.

Korea¡¯s public corporations are set to suffer from shrinking profits and mounting debt, largely, as some experts criticized, due to Moon administration¡¯s policies on energy and employment. Since its launch in May last year, Moon government has pushed to replace nuclear power generation with renewable energy and create a massive number of jobs in the public sector. Such moves have placed heavier financial burdens on utility companies in particular. Combined net profits earned by 38 major public institutions with assets worth more than KW2 tril ($1.77 bil) are projected to plummet to KW700 bil this year from KW6.9 tril last year. The figure amounted to KW14.8 tril in 2016. Korea Electric Power Corp has lowered its estimated net profits for 2020 by 78.1%. Korea Hydro and Nuclear Power and other state-funded utility companies also expect their net profits to be far less than estimated in 2016. Experts say utility companies will be compelled to borrow heavily to cover trillions of won in annual facility investment if their profits continue to decrease. With their profits declining, the combined debt owed by the 38 major public entities is estimated to exceed KW500 tril for the first time in 2020. KEPCO is expected to record the largest debt increase of KW9.5 tril over the coming three years, followed by KW8.1 tril for the Korea Land and Housing Corp and KW3.3 tril for KHNP.

Bank of Korea on 18th held its policy rate at 1.5% for the 11th straight month on worsening economic data and low inflation pressure, taking a wait-and-see stance since Nov last year. BOK forecast 2.9% growth for 2018, down 0.1% from its earlier outlook. Facility investment dropped for six months in a row, marking the longest monthly decline since the 1997 Asian financial crisis. The number of newly added jobs stayed below 10,000 on-month for two straight months in July and Aug, fueling concerns that the economy is losing steam. Consumer prices have still stayed below the target inflation of 2% for months, despite a recent upside trend by an oil price hike.

SKorea¡¯s manufacturing capacity index had declined for five consecutive months as of July, from 102.9 to 102.6. The annual average figure for 2015 is set at 100. The index reading for July represented a downward slide of 1.3% on-year, the steepest on-year decline since 1971. The index dropped 0.6% on-year in March, 1% each in April and May, and 1.1% in June. The continual downturn in the country¡¯s manufacturing capacity comes as Korean economy is having difficulty finding new growth engines while its key traditional manufacturers face intensifying challenges from foreign competitors, especially Chinese firms. A rise in exports, mainly on the strength of export of memory chips and petrochemical products, should not veil the weakening of other manufacturing industries. The capacity index for shipbuilding plummeted from 104.3 in Jan 2015 to 68.3 in July 2018. The weakening of the manufacturing sector comes with falling employment levels. The number of workers hired by manufacturing companies in Korea declined from 4.48 mil in 2016 to 4.42 mil last year. The US, Japan and Germany saw their manufacturing workforces expand from 12.35 mil, 9.96 mil and 7.9 mil to 12.55 mil, 10.06 mil and 8.01 mil, respectively, over the period.

Korea¡¯s Composite Stock Price Index started the month at strong at 2,338, but continued to fall breaking 2,300 barrier, following a plunge in stocks at Wall Street amid surfacing doubts about current tech stock valuations in the US and fears on lingering US-China trade war threats. KOSPI dropped 4.4% to close at 2,129.67 on 11th, the largest daily losses since Nov and Sept 2011, and the lowest since April and Sept 2017, respectively. Bearish market sent KOSPI below the psychological threshold of 2,000 to 1,996 on 29th, once again renewing its all-year low, despite the government¡¯s urgent moves for countermeasures with fresh inject of some KW500 bil ($438 mil). This marked the fifth consecutive day of market retreat, as well as the first time in 22 months that KOSPI fell lower than 2,000. KOSPI has recovered 2,000 level to close the month at 2,029.

KDB has decided to offer financial supports of KW1 tril (about $878 mil) for its struggling compatriot shipping major HMM. HMM has decided to issue KW400 bil of convertible bonds (CBs) and KW600 bil of bonds with warrants (BWs). The entire offering will be taken over by the KDB, HMM's biggest shareholder. HMM ordered 20 containerships from HHI, SHI, and DSME, so that it is liable for payment of KW300 bil, 10% of the whole construction costs KW3 tril.  In addition, HMM needs funds for Busan New Port Pier 4, buying containers, etc. The government has recently prepared a plan to help normalize HMM and is closely consulting with the company to expand its capital by KW800 bil by the end of the year. If HMM issues equity securities, KDB and KOBC, which was launched in July, are expected to purchase KW400 bil worth of securities each. As other global shipbuilders are growing up by M&A and dominate the market with economies of scale, HMM needs to be raised to the level of 1 mil TEUs to secure global competitiveness. HMM will be able to secure about KW5 tril of funds by combining the investment funds and the government's additional financial support for ships by the end of this year. Meanwhile, KOBC, which was launched with the aim of rebuilding the domestic shipping industry, will take the helm of the realignment of the domestic shipping industry on the occasion of its support for HMM. By 2020, HMM will be jointly managed by KOBC and KDB, and since then, KOBC will take over the management authority to lead restructuring.

TOPICS.

President Moon¡¯s nine-day trip to Europe scored little-success [p.2]

China and Japan move to reinvigorate their economic partnership against US trade pressure [p.3]


Korea granted one-year humanitarian stay permits to 339 Yemeni asylum on Jeju Island [p.3]


SKorea and the US are falling for Kim Jong-un¡¯s ¡°tricks,¡± Bruce Klingner said [p.8]


NK requested the US to take corresponding steps in response to its major conciliatory action [p.9]


US Secretary of State Mike Pompeo visited NK, SKorea and China [p.9]


S&P maintained its rating on SKorea at the third-highest level of "AA" [p.11]


Growing uncertainties in the external environment pose downside risks to Korean economy [p.11]


Korea¡¯s public corps suffer from shrinking profits and mounting debt, due to gov¡¯t policies [p.11]


SKorea¡¯s per-capita GDP looks to surpass $30,000 this year and exceed $40,000 in 2023 [p.12]


Bank of Korea on 18th held its policy rate at 1.5% for the 11th straight month [p.12]


IMF, OECD and UBS lowered Korea¡¯s economic growth to 2.6-2.8% [p.12]


SKorea¡¯s manufacturing capacity index declined for 5 consecutive months as of July [p.14]


PERFORMANCE IN THIRD QUARTER OF THE YEAR [p.15]


Lotte Group Chairman Shin Dong-bin returned to work [p.16]


Fears on US-China trade war sent KOSPI below psychological threshold of 2,000 [p.18]


SKorea's consumer price growth accelerated in Oct, hitting the highest in 13 months [p.19]


Market climate is good to HHI, not so good to SHI and DSME [p.20]


Global newbuilding orders recorded 738 units of 57.6 mil dwt as of end Sept [p.21]


DSME expect LNG carriers for more than 50% of its annual revenue [p.24]


Hahn & Co has become the largest shareholder of SK Shipping [p.24]


KDB to offer financial supports for its struggling compatriot shipping major HMM [p.25]


Korean government to help construction of 200 ships in the next three years [p.25]


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