Official forecasts optimistic, but economists predict modest upturn

SEOUL: Foreign direct investment in South Korea last year plunged by nearly one-third, in a blow to President Roh Moo-hyun's aim of establishing the country as a regional business hub.

The sharp drop underscores concerns South Korea, which suffers frequent strikes at major industrial plants, might lose foreign investment to China, which draws money with its much cheaper workforce and bigger economy.

Proposed foreign direct investment (FDI) fell 29 per cent in 2003 to US$6.47 billion, the Commerce Ministry said in a statement last week.

Fourth-quarter FDI was 1.1 per cent lower than a year earlier, at US$1.84 billion.

Blaming the fall on stuttering economies at home and abroad, the ministry said South Korea should win more foreign investment in 2004, although analysts said the recovery will only be modest as economic growth had yet to pick up speed.

Despite upbeat officials' forecasts for FDI this year of around US$10 billion, economists see only a modest turnaround for 2004.

"About 80 per cent of investment coming to South Korea is aimed at doing business in the domestic market, and I expect investment to increase modestly this year on hopes for a faster recovery in 2005," said Jang Yoon-jong, an economist with the Korea Institute for Industrial Economics and Trade.

He forecast FDI of no more than US$8 billion this year.

Money needed

Foreign investment has become more important than ever in South Korea to combat unemployment.

The jobless rate is hovering around highs not seen in several years, as local companies are reluctant to hire workers and some are investing offshore instead.

International Monetary Fund data indicate annual FDI inflows into China have jumped by half since the mid-1990s, although Chinese figures show inflows levelled off last year.

FDI into Japan hit US$9.2 billion in the April-September period last year - up more than half from the same period of 2002.

South Korea has said its top priority for 2004 will be creating jobs by inducing investment, a policy direction stressed by Roh in a speech to business leaders.

Roh, who some in the business community accuse of being soft on labour unrest, said harmonious labour relations is a key aim for this year.

Frequent, sometimes violent, labour disputes have concerned foreign investors.

South Korea's economy crawled out of recession in the third quarter. It was driven by robust exports.

Confirming the bullish outlook for exports, the governor of South Korea's central bank said last Tuesday global economic conditions continued to improve for the country.

But depressed consumer spending and corporate investment threaten a sustained economic recovery. Economists suggest these factors will prompt the central bank to keep interest rates at record lows for the foreseeable future.

Separate data released by South Korea's top business lobby group indicated the top 600 companies grew more optimistic about business conditions in January.

That reflected expectations of a faster economic recovery.

The Federation of Korean Industries said its Business Survey Index for January rose to a seasonally adjusted 111.2 from 109.8 in December.

An index above 100 shows the number of firms that see an improvement in conditions tops those expecting a deterioration.

However, a continued liquidity crisis at the country's largest credit card company has clouded prospects for a quick recovery in consumer spending.

Hard-pressed card issuers have tightened lending.

Agencies via Xinhua

(Business Weekly 01/13/2004 page2)