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3 Jun 2009

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South Korean Economy Recovering: ASEAN-S.Korea FTA Driving Trade & Investment (Business Brief No.2162)

Prime Minister Abhisit Vejjajjiva and Thai delegates, including leading businesspersons, attended the Asean-South Korea Commemorative Summit and the CEO Summit at Jeju island on June 1-2, 2009. The Prime Minister signed the 5th FTA on Investment between ASEAN-South Korea, aimed at strengthening trade and investment between the two sides. It is expected that this agreement will help pave the way for greater opportunities in trade, services and investment between Thailand and South Korea. It is considered positive for Thailand, wherein South Korea's economy is showing signs of recovery. In 1Q09, South Korea's economy grew 0.1 percent over the preceding quarter, representing the highest growth among industrialized nations in the Organization for Economic Co-operation and Development (OECD), which have been the worst hit by recession.
The confidence of South Korean consumers toward economic recovery has improved, and their Consumer Confidence Index increased from 98 in April to 105 in May 2009, the highest level since 3Q07. Moreover, the South Korean government has approved an additional budget of USD13,900 million to stimulate domestic consumption on top of the USD 37billion approved previously. KASIKORN RESEARCH CENTER (KResearch) holds the view that the FTA between ASEAN-South Korea is vital toward helping expand opportunities in trade, services and investment between Thailand, other ASEAN member countries and South Korea.
Regarding international trade, during Jan-April 2009, trade between Thailand and South Korea totaled USD2,454.54 million, falling almost 26 percent YoY. Thai exports to South Korea were valued at USD844.08 million, contracting 21.35 percent YoY. Thailand posted a trade deficit with South Korea of USD766.38 million. Trade between Thailand and South Korea has slowed due to the global financial crisis that has hampered consumption and investment in South Korea. However, KResearch projects that Thailand's exports to South Korea should improve in 2H09, because of improving economic trends expected to be seen in South Korea and the world in late 2009.
Positive signals have been seen in the improved economic indicators of major economies such as the USA, EU, China and Japan. Significantly, these signs have suggestedthat South Korea's economy may be over the worst already. Notably, South Korea's export sector contracted only 19 percent YoY in April, which was less than the contraction of 22 percent YoY in March, thus signaling greater stability in South Korea's economy. South Korea's imports in 1Q09 also improved as they had contracted only 7 percent against a sharp contraction of 15.7 percent in 4Q08. If South Korea's economy improves along these lines, it should be a driving force for Thailand's exports, especially electronics, household electrical appliances and parts, electrical machinery and parts, electronic integrated circuits, etc.
Previously, direct investment by South Korea into Thailand had been affected by the global crisis, decelerating it. Thailand's political problems have also hampered investor confidence. These negative factors have hindered the South Korean investment growth into Thailand. During January-April 2009, there were only 7 South Korean investment projects asking for investment promotions in Thailand, falling more than 63 percent YoY, and the total investment value of THB373 million, dropping more than 81 percent YoY from THB1,965 million in the same period of 2008. South Korea's investments in Thailand are only 1.72 percent of the aggregate investments of all foreign investors into Thailand.
To South Koreans, the most attractive businesses for investment in our country appear to be electrical appliance and electronics industries, followed by minerals/ore, ceramics and service industries. However, the direction of South Korea's investments in Thailand will likely improve in 2H09 along with their recovering economy and economic stimuli measures. In addition, an improving economic situation in Thailand will help restore South Korean confidence toward investment here. A bright future seems to lie ahead for our electronics, electrical appliance and automotive industries because South Korean investors may increase their investments in these industries.
Also, KResearch views that the ASEAN- Korea Free Trade Agreement (AKFTA) on service and investment will benefit Thailand in the following matters:
- The AKFTA tax privilege will help boost Thai exports to South Korea due to tariff reduction allowed by South Korea. Thai export competitiveness will improve to compete with other countries in ASEAN that have undergone trade liberalization since June 2007. Thai exports with potential include electrical appliances and accessories, acrylic thread, molasses, compressors, frozen food, gems, jewelry, particleboard, etc. Meanwhile, Thailand will benefit from the lower import costs so we can import lower-priced raw materials from South Korea.
- Benefits from the 5th FTA investment agreement are comprehensive and it protects investments mutually between ASEAN nations and South Korea. Thailand will become a manufacturing hub for South Korea to serve the world market, and a distribution center to export products into other ASEAN countries via AKFTA privileges.
- The Thai service sector will have the chance to expand into South Korea and other countries in ASEAN, including hotels, restaurants, spas, Thai traditional massage parlors, cleaning, recreation, etc.

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