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4. Financial market.

4.1 Interest Rates

Long-term interest rates, including those on three-year benchmark government bonds plummeted after the Bank of Korea reduced the overnight call rate August 12th from 4.08 percent at the end of July to finish August at 3.56 percent. This substantial reduction was attributable to concerns about an economic recovery failing to materialize as oil prices continued to escalate and expectations mounted for another interest-rate cut. Forecasts that bond issuances would continue to fall short of demand was another contributing factor to the decline in long-term rates, which was larger than the call rate cut by the Bank of Korea.

Short-term interest rates such as those for CD yields also declined in August, down 0.38 percentage point from the end of the previous month.
(End-period, Percent)

                            2002          2003

                                    Oct    Nov    Dec

* Treasury Bonds (3 yr.)    5.11   4.48   4.88   4.82
* Corporate Bonds (3 yr.)   5.68   5.32   5.60   5.58
* CDs (91 days)             4.90   4.05   4.28   4.36
* KORIBOR (1 yr.)            --     --     --     --

                                          2004

                             Apr    May    Jun    Jul    Aug

* Treasury Bonds (3 yr.)    4.43   4.24   4.24   4.08   3.56
* Corporate Bonds (3 yr.)   5.14   4.91   4.84   4.65   4.11
* CDs (91 days)             3.90   3.89   3.93   3.90   3.52
* KORIBOR (1 yr.)            --     --     --    4.09   3.59

Source: Bank of Korea


4.2 Stock Market

Stock prices continued an upward trend throughout August as investment banks revised their outlook for portfolio investment in Korea upward after the call rate reduction improved investor sentiment and the belief that domestic stocks are undervalued continued to spread.

Net purchases were up substantially in August as foreign portfolio investment in domestic bank and distribution stocks increased steadily and technology stocks were buoyed by expectations of an IT industry recovery.

The KOSPI rose 68.23 points or 9.3 percent between the end of July and August to 803.57 points, while KOSDAQ gained 24.45 points or 7.4 percent to finish August at 355.66 points.
(End-period indexes)

            2001     2002     2003

* KOSPI    693.70   627.55   810.71
* KOSDAQ    72.21    44.36    448.7

                                 2004

              Mar      Apr      May      Jun      Jul      Aug

* KOSPI    880.50   862.84   803.84   785.79   735.34   803.57
* KOSDAQ   434.16   453.47   400.92   385.18   331.21   355.66

Source: Bank of Korea


4.3 Exchange Rates

The won gained strength against the dollar by edging down from 1170.0 at the end of July to 1153.0 by the end of August. This downward movement was attributable to the yen appreciating against the greenback as the U.S. employment and trade balance remained stagnant and the inward flow of dollars increased as foreign portfolio investors bought more domestic stocks.

This deceleration slowed as the month came to an end, however, as concerns about rising oil prices mounted and the demand for dollars to settle trade transactions by importers increased.
(End -period FX rate)

                   2002      2003

* Won/Dollar    1,186.2   1,192.6
* Yen/Dollar      118.5     106.9
* Won/100 Yen     999.9   1,115.4

                                  2004

                    May       Jun       Jul       Aug

* Won/Dollar    1,160.1   1,155.5   1,170.0   1,153.0
* Yen/Dollar      109.5     108.8     111.8     109.8
* Won/100 Yen   1,059.5   1,062.2   1,046.8   1,050.2

Source: Ministry of Finance and Economy


4.4 Money Market

After decreasing 6.5 trillion won in July, bank deposits declined another 3.9 trillion won in August as funds continued to flow into bond-type investment trust management company (ITMC) funds as a result of a substantial decline in market rates. ITMC receipts were up 3.9 trillion won in August.

The flow of capital into the stock market remained sluggish despite rising stock prices as did real estate sales. Stock- and mixed-type fund ITMC deposits decreased or remained flat and housing market transactions were also weak as housing prices continued to edge downward.
(Monthly average change, Trillion won)

                    2003                        2004

               Annual     Q1    Q1     Q2    May    Jun    Jul    Aug

* Bank            3.3    6.1   0.9    1.5    4.4    1.0   -6.5   -3.9
    deposits
* ITMC           -2.4   -5.9   5.7   -0.5    1.4   -0.4    6.8    3.9
    Receipts

Source: Bank of Korea


4.5 Money Supply

The on-year M3 growth rate is estimated to have remained in the lower 6 percent range in August as the private sector credit supply was sluggish and the current account surplus narrowed.

The new M1 growth rate is estimated to have fallen in August from 10.2 percent the previous month to the mid 8 percent range as weak domestic demand slowed the flow of settlement money and the downward movement in housing prices reduced the demand for stand-by money.
(Percentage change from same period the previous year)

                        2003

               Annual     Q1    Q2

* M3 (1)          8.8   12.4   9.6
* New M2 (2)      7.9   13.1   9.1
* New M1 (3)      6.9   10.3   5.5

                                2004

                Q1    Q2    May   Jun   Jul     Aug

* M3 (1)       5.1   5.8   5.9   6.0    5.9   About-6
* New M2 (2)   2.6   3.8   3.9   4.4    4.6    Mid-4
* New M1 (3)   7.3   9.4   9.2   9.2   10.2    Mid-8

(1) Currency in circulation + deposits at bank and
non-bank financial institutions+ bank debentures
issued + commercial bills sold + CD + RP + cover bills
(includes cover bills since Nov. 1989)

(2) Deposits with up to 2-year maturities (excluding
life insurance and securities companies)

(3) Demand deposits + instant access accounts +
deposits in MMFs at ITMCs

(P): Preliminary

Source: Bank of Korea


4.6 Corporate Financing and Household Loans

Corporate financing was down 1.6 trillion won in August after increasing 2.6 trillion won in July.

Corporate bank loans reversed course by declining 0.4 trillion won in August after rising 2.6 trillion won in July as loans to small- and medium-sized enterprises remained weak.

There was a 1.7 trillion won net redemption of corporate bond issuances despite favorable conditions such as the large decline in the market interest rates.

Seasonal factors such as summer vacation spending and tuition loans brought a 3.0 trillion increase in bank lending to households in August. Mortgage-backed loans were only up 1.1 trillion won, similar to the 0.9 trillion won registered the previous month.
(Trillion won)

                                  2003

                            Annual    Aug

* Corporate Loans             30.7    1.7
 --Large Companies            -4.3   -0.2
 --SMEs                       35.0    1.9
* Corporate Bonds             -4.0   -1.0
* CPs                         -2.0    1.5
* Stocks                       2.8    0.1
* Total                       27.4    2.3
* Household Loans             30.6    3.2
 --Mortgage-based Loans *     21.3    2.0

                                              2004

                               1Q     2Q    May    Jun    Jul    Aug

* Corporate Loans             8.2    1.7    1.2   -2.0    2.6   -0.4
  --Large Companies           1.2   -2.3   -0.3   -1.8    0.6    0.2
  --SMEs                      7.0    4.1    1.5   -0.2    2.0   -0.6
* Corporate Bonds            -1.7    1.9    0.5    1.0   -1.1   -1.7
* CPs                         2.3   -3.0   -1.7   -1.1    1.3    0.0
* Stocks                      0.5    1.1    0.2    0.3    0.5    0.6
* Total                       9.3    1.8    0.2   -1.7    3.3   -1.6
* Household Loans             5.1    6.3    2.7    1.8    1.2    3.0
  --Mortgage-based Loans *    3.0    5.2    1.8    1.6    0.9    1.1

* Based on loans collateralized by bank accounts
and mortgages

Source: Bank of Korea
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Title Annotation:Monthly Economic Trends
Publication:Economic Bulletin (Korea)
Geographic Code:9SOUT
Date:Sep 1, 2004
Words:1276
Previous Article:3. Prices and employment.
Next Article:Seven companies including MS to build digital entertainment cluster in Incheon FEZ.
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