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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.