=

Republic of Korea
SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S May 25, 2008

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 98 11. E-mail: rolf.danielsen@seb.se

Activity has begun to slow as gathering clouds over the world economy are hitting domestic
sentiment of this export oriented economy. Confusing policy signals form a new government have
not helped ease investor concerns as seen in an increasingly volatile exchange rate.

Country Risk Analysis
OMMT=ï~ë=ëíáää=~=ÖççÇ=óÉ~êK==Iasl year, overaII grovll remained a sleady 5°
driven by soIid domeslic demand and buoyanl exporls. As a resuIl, lle
exlernaI currenl accounl baIance remained in a smaII surpIus and combined
vill sleady capilaI infIovs lo creale a favorabIe environmenl for lle
exclange rale. Ioreign reserves in lle lands of lle cenlraI banI ended lle
year al more llan $260 biII.
-- equivaIenl lo 7 monlls of
imporls and exceeding
exlernaI debl by a vide
margin. Tle governmenl
budgel conlinued lo posl a
smaII surpIus, leIping
reduce lle debl/GDI-ralio
lo beIov 25°. AII llis vas
in Iine vill lle successfuI
recovery during lle Iasl len
years since lle Asian crisis,
vlicl lad lil lle Korean
economy lard in 1997/98.
$bill.
Current account balance
South Korea, Current Account, Balance, Total, USD
Source: Reuters EcoWin
jan
06
apr jul okt jan
07
apr jul okt jan
08
apr
-150
-100
-50
0
50
100
150
200
250

OMMU=ÅçìäÇ=ã~êâ=íÜÉ=ÄÉÖáååáåÖ=çÑ=~=åÉï=íêÉåÇK==In lle firsl quarler of 2008
GDI vas up 5,7° compared lo lle same period of lle previous year, bul on a
quarlerIy basis GDI sIoved lo onIy 0,7° grovll compared vill 2007 O4, ils
mosl modesl resuIl since earIy 2004. Observers reporl of increasing
leadvinds lo lle economy. Manufacluring remained aImosl fIal on lle
previous quarler as firms reporledIy became increasingIy vary of lle
delerioraling oulIooI for main exporl marIels and scaIed dovn lleir
inveslmenl pIans. Services grovll vas aIso lil in response lo soflening
consumer demand vlicl rose onIy 0,6° from lle Iasl quarler of 2008. TolaI
exporls vaIue appears lo lave leId up reasonabIy veII, bul reaI exporls (in
conslanl prices) acluaIIy edged dovn. Tlal came on lle leeIs of
exceplionaIIy slrong grovll in lle fourll quarler of Iasl year, llus
mainlaining a IeveI some 12° ligler llan in lle firsl quarler of 2007. On a
darIer nole, lovever, slarpIy vorsening lerms of lrade (average exporl
prices over imporl prices) due lo prices of imporled oiI and food lave so far
SEB Merchant Banking Country Risk Analysis May 25, 2008

2
llis year senl lle exlernaI currenl accounl baIance inlo a rapidIy videning
deficil and lle consumer price infIalion on lle vay up.

pçìêáåÖ=Åäáã~íÉ=ÅçãÄáåÉë=ïáíÜ=ÅçåÑìëáåÖ=éçäáÅó=ëáÖå~äë. None of lle
above vouId normaIIy lave been lo any major concern for a counlry vill
Korea's soIid economy and financiaI macro baIances bul for lle poIilicaI
vinds nov coming from a nev adminislralion in lle bIue louse. Tle nev
presidenl, Mr. Iee Muyng-baI, of lle rigll-of-cenler NalionaI Grand Iarly,
vlicl von a Iand-sIide viclory in Iasl December, las made buIIisl promises
of slepped up grovll. WliIe mucl of llis may be slrugged off as posluring
from a nev presidenl Inoving llal lle Conslilulion gives lim onIy one lerm
in office lo pul lis marI on lislory, pIans announced lo buiId a valer-vay
llrougl lle mounlainous Korean peninsuIa gives lle impression of
unreaIism laving laIen lle driver' seal in poIilicaI circIes. WliIe sucl and
oller grandiose sclemes are sliII on lle draving board, more immediale
concern is lle groving suspicion
llal lle nev adminislralion las
begun lo Iean leaviIy on lle
cenlraI banI lo supporl overaII
demand of lle economy despile
rising infIalion fears. Tlus, as
lle von began lo veaIen rapidIy
for oller reasons in Iale
Iebruary, lle cenlraI banI sal
idIe for llree veeIs valcling lle
exclange rale in aImosl free faII
againsl a soflening doIIar before
il finaIIy inlervened in supporl of
lle von.
1
Tlal seemed lo smacI
of inlerference from a
governmenl vlicl couId see an inleresl in a veaIer von lo leIp lle exporls.
As sucl il dumbfounded mosl marIel parlicipanls vlo lad come lo beIieve
in lle cenlraI banI's de faclo, if nol de jure independence.
Won/US$
Exchange rate
Source: Reuters EcoWi n
jan
06
apr jul okt jan
07
apr jul okt jan
08
apr
900
925
950
975
1000
1025
1050
1075
-- RecenlIy, exclange rale voIaliIily reoccurred bul llis lime prompling a
limeIier cenlraI banI inlervenlion.

qÜÉ=ÖçîÉêåãÉåí=~äëç=~ååçìåÅáåÖ=ÑìêíÜÉê=êÉÑçêãë. On a more posilive nole,
by conlrasl, lle nev presidenl las announced reforms sucl as crealing a
corporale-friendIy environmenl, allracling foreign business by reducing
reguIalions and lle corporale lax rales, promoling an LngIisl-friendIy
environmenl and raising lle fIexibiIily in lle Iabor marIel. SIeplics poinl
oul, lovever, llal slrong vesled inleresls couId llvarl sucl reform efforls
and llal lle presidenl al lle end of lle day may resorl lo safer poIicies for lis
poIilicaI slanding incIuding fiscaI pump-priming.

qÜÉ=éÉêÉååá~ä=èìÉëíáçå=çÑ=íÜÉ=ÇáÑÑáÅìäí=ÄêçíÜÉê=ìé=åçêíÜK On lle main
foreign poIilicaI issue ÷ Norll Korea, slalus quo is unclanged. If anylling is
nev, il is onIy lle increasingIy vider acceplance of lle very difficuIl sociaI
and lumanilarian silualion in Norll Korea. Bul fev in lle soull seem

1
At this time there was a coincidence of weaker net export revenues as the current account
balance turned into a deficit of around 2% of GDP and a sudden drop in capital inflows to the
banks, as the latter suddenly faced a sharp drop in domestic ship-builders’ future dollar sales
to match the banks’ external borrowing. As a result, the balance of payments turned negative.

SEB Merchant Banking Country Risk Analysis May 25, 2008

3
viIIing lo engage in a discussion on lov lo landIe a silualion vlere miIIions
of underfed brellrens from lle norll couId cross lle border foIIoving a
possibIe coIIapse of lle Iyongyang regime in a perlaps nol loo dislanl
fulure. According lo Slandard and Ioors, reunificalion cosls couId be
anylling from 40°-300° of GDI spread over severaI years. Some peopIe
incIuding al liglesl officiaI IeveIs seem lo be in a slale of deniaI, cIaiming llis
is an unllinIabIe disasler of a magnilude Soull Korea cannol possibIe bear
ilseIf. IrivaleIy, oller peopIe suggesl unconvenlionaI soIulions, incIuding
llal Clina laIes over Norll Korea. Keeping in mind lle proIonged and
valerligll separalion of lle lvo counlries lle emolionaI affinily of lle Soull
Koreans lo lleir former norllern compalriols may lave veaIened as mucl
lime las passed. -- Mosl observers appear lo agree llal lle aflermall of a
regime coIIapse in lle norll is liglIy unprediclabIe. Because of llal and lle
polenliaIIy enormous cosls lo Soull Korea ÷ and lo a Iesser exlenl lo
neiglbouring Clina, llere couId be an incenlive lo deIay llis day of
recIoning.
-´-
hçêÉ~=ÅçåíáåìÉÇ=íç=éÉêÑçêã=ïÉää=áå=OMMTI=Äìí=Ü~ë=ëáåÅÉ=É~êäó=OMMU=ëÜçïå=ëáÖåë=çÑ=
ÅÜ~åÖáåÖ=íêÉåÇë=ÇìÉ=íç=êáëáåÖ=ÅçåÅÉêåë=çîÉê=Üçï=íÜÉ=Éñéçêí=çêáÉåíÉÇ=ÉÅçåçãó=ïáää=
ïÉ~íÜÉê=íÜÉ=ïçêëÉåáåÖ=çÑ=íÜÉ=ÖäçÄ~ä=ÉÅçåçãóK==qÜ~í=~ÇÇë=íç=ÅçåÅÉêåë=~ãçåÖ=
áåîÉëíçêë=~åÇ=çíÜÉê=ã~êâÉí=é~êíáÅáé~åíë=çîÉê=Üçï=~=åÉï=éêÉëáÇÉåí=~åÇ=Üáë=
~Çãáåáëíê~íáçå=ïáää=Ü~åÇäÉ=íÜÉ=ÅÜ~ääÉåÖÉëK==cÉ~êë=~êÉ=íÜ~í=íÜÉó=ã~ó=éìêëìÉ=íçç=
~ãÄáíáçìë=Öç~äë=~åÇ=ä~ìåÅÜ=ìåêÉ~äáëíáÅ=éêçàÉÅíë=ïÜáäÉ=çîÉêJêìäáåÖ=ÅÉåíê~ä=Ä~åâ=
çÄàÉÅíáçåë=íç=ãçåÉí~êó=É~ëáåÖ=áå=íÜÉ=Ñ~ÅÉ=çÑ=êáëáåÖ=áåÑä~íáçå=éêÉëëìêÉK=tÜáäÉ=íÜÉëÉ=~êÉ=
ÅçåÅÉêåë=íÜ~í=Ñêçã=~Ñ~ê=ã~ó=äççâ=éêÉã~íìêÉ=Ñçê=~=Åçìåíêó=~ë=ëçäáÇ=~ë=pçìíÜ=hçêÉ~=
êÉÅÉåí=ÉñÅÜ~åÖÉ=ê~íÉ=îçä~íáäáíó=ëÉÉãë=íç=ÅçåÑáêã=íÜÉ=çäÇ=~Ç~ÖÉ=íÜ~í=ÅçåÑáÇÉåÅÉ=áë=É~ëáÉê=
äçëí=íÜ~å=Ö~áåÉÇK==cçê=~=Åçìåíêó=áå=ëìÅÜ=~=ëíêçåÖ=êáëâ=Åä~ëë=~ë=hçêÉ~I=ÅçåÑáÇÉåÅÉ=áë=~=
éêÉÅáçìë=ÅçããçÇáíó=íÜ~í=ã~ó=Åçëí=ÇÉ~êäó=íç=äççëÉK==^í=íÜÉ=ë~ãÉ=íáãÉ=íÜÉ=Åçããìåáëí=
êÉÖáãÉ=çÑ=kçêíÜ=hçêÉ~=êÉã~áåë=~=a~ãçÅäÉë=ëïçêÇ=çîÉê=íÜÉ=ëçìíÜK==^äíÜçìÖÜ=~=ïÉääJ
âåçïå=~åÇ=äçåÖJëí~åÇáåÖ=íÜêÉ~íI=íÜÉ=Ç~ó=çÑ=êÉÅâçåáåÖ=ïáää=áåÉîáí~Ääó=ÄÉ=ÅçãáåÖ=
ÅäçëÉêK=

hÉó=ê~íáçë OMMT
IopuIalion (miII.) 47282
GDI/capila ($) 20118
GDI(° clange) 5,0°
InfIalion 3°
Curr.Acc. BaIance/GDI 1°
Reserves/imporls (monlls) 8
Budgel baIance/GDI 1°
Governmenl nel debl/GDI 27°
dê~éÜW Korea's risI profiIe is slronger on resiIience
and Iiquidily llan lle average for aII emerging
marIel counlries. Hovever il is veiglled dovn by
evenl risI, mucl IiIe ils peer Taivan.
bñíÉêå~ä=ê~íáåÖëW=
Iilcl: A+
S&I: A
mÉÉêëW
Czecl Rep.
Iilluania
Taivan
0
2
4
6
8
10
12
14
16
Resilience
Liquidity
Information
Absence of event
risk
Macro balance
Korea Average EM
Taiwan
eçï=íç=êÉ~Ç=íÜÉ=ÅÜ~êí\
Moving oul from lle
cenler reduces risI.




SEB Merchant Banking Country Risk Analysis May 25, 2008

4
hÉó=Ç~í~W OMMO OMMP OMMQ OMMR OMMS OMMT OMMU OMMV
GDI (biII. US$) 548 608 681 791 889 970 995 1074
GDI/capila (US$) 11 601 12 813 14 292 16 524 18 494 20 118 20 563 22 135
GDI (clange) 7,0° 3,1° 4,7° 4,2° 5,1° 5,0° 4,7° 4,7°
Inveslmenls/GDI 30° 30° 29° 29° 28° 28° 28° 28°
Budgel baIance/GDI 3° 1° 1° 1° 0° 1° 0° 0
Govl debl/GDI 17° 17° 21° 27° 28° 27° 26° 25°
CII infIalion (°) 2,8° 3,5° 3,6° 2,7° 2,2° 2,5° 3,7° 3,2
Mone
°
°
y demand (°) 8,7° 3,9° 1,2° 4,1° 6,5° 8,7° 9,0° 7,1°
SlocI prices (°clange) 32,2° -10,2° 22,6° 28,5° 26,3° 26,7°
Inleresl rales 4,8° 4,3° 3,8° 3,6° 4,5° 5,2° 5,3° 5,1°
Lxcl. Rale ($) 1252 1192 1146 1024 955 929 973 967
Trade/GDI (°) 72° 73° 80° 71° 68° 70° 82° 85°
OiI price (Brenl) $25 $29 $38 $54 $65 $73 $112 $106
_áääáçåë=rp=A
Lxporl of goods 203 231 291 291 311 345 410 461
Imporls of goods 190 213 257 268 295 331 411 448
Oller: -8 -6 -6 -9 -10 -8 -5 -9
Currenl accounl 5,4 11,9 28,2 15,0 5,4 6,0 -6,3
as ° of GDI 1,0° 2,0° 4,1° 1,9° 0,6° 0,6° -0,6° 0,3°
IDI 2,4 3,5 9,2 6,3 3,6 1,6 1,6 1,6
Ioan re
3,4
paymenls (MUSD) -23 -29 -30 -31 -31 -31 -31 -
Nel oller ca
32
pilaI fIovs (M 31 37 31 40 42 50 52 45
BaIance of paymenls 16 24 38 31 21 26 16 18
Reserves 131 151 188 222 247 273 0 0
TolaI debl 119 137 140 140 140 140 140 140
o/v slorl lerm debl 44 53 53 54 55 55 56 56
o~íáåÖ=Üáëíçêó
Iilcl (eoy) BBB+ BBB+ A A A+ A+
Moody's (eoy) Baa2 A3 A3 A3 A3 A3
S&I (eoy) BBB A- A- A- A A
qóéÉ=çÑ=ÖçîÉêåãÉåíW
Nexl eIeclions IresidenliaI: 2012
líÜÉêW
Ialesl IC deaI None
Ialesl IMI arrangemenls Sland-by 1997
S t o c k s : K O S P I 1 0 0 I n d e x
S o u r c e : R e u t e r s E c o W i n
j a n
0 6
a p r j u l o k t j a n
0 7
a p r j u l o k t j a n
0 8
a p r
I
n
d
e
x
1 1 0 0
1 2 0 0
1 3 0 0
1 4 0 0
1 5 0 0
1 6 0 0
1 7 0 0
1 8 0 0
1 9 0 0
2 0 0 0
I n t e r b a n k R a t e s , K O R I B O R , 3 M o n t h , K R W
S o u r c e : R e u t e r s E c o W i n
j a n
0 6
a p r j u l o k t j a n
0 7
a p r j u l o k t j a n
0 8
a p r
P
e
r
c
e
n
t
4 , 0 0
4 , 2 5
4 , 5 0
4 , 7 5
5 , 0 0
5 , 2 5
5 , 5 0
5 , 7 5
6 , 0 0
C o n s u m e r P r i c e s , T o t a l I n d e x
S o u r c e : R e u t e r s E c o W i n
j a n m a j s e p j a n m a j s e p j a n
0 6 0 7 0 8
P
e
r
c
e
n
t
1 , 5 0
2 , 0 0
2 , 5 0
3 , 0 0
3 , 5 0
4 , 0 0
a n n u aliz e d g r o w t h
M 3 ( b r o a d m o n e y )
S o u r c e : R e u te rs E c o W i n
j a n m a j s e p j a n m a j s e p j a n
0 6 0 7 0 8
P
e
r
c
e
n
t
6
7
8
9
1 0
1 1
1 2



SEB Merchant Banking Country Risk Analysis May 25, 2008

5

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Important: This statement affects your rights

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