Thursday, February 24, 2011

Economics is a "Con" Game: A Matter of "Con"fidence and Koreans' Lack of It

No Way to Put Lipstick on This Pig:  Korean Consumer Confidence at 21-Month Low
Today, even reported that Korean consumer confidence hit a 21-month low.  Literally, a few moments ago, the Seoul Gyopo Guide pointed this out as a large problem for the Korean economy.  Simply put, if you are not confident in your financial situation, you are less likely to spend.  Less spending means less profits for Korean corporations.  Less profits means lower bonuses and more unemployment.  In other words, confidence is very important because it can begin or end a vicious circle.  That is why consumers' confidence is measured and watched very carefully by the press, and policy-making officials.

The Middle East Situation Isn't Helping
Not only are the revolutions in the Middle East increasing the cost of oil, but there are other more direct effects as well.  Korean engineering and construction (E&C or 건설) companies have turned to foreign construction projects as a large source of revenues.  In the most recent protests in Libya, Korean constructions projects were targeted.  While the individual project losses may be limited due to insurance, the chance that there will be additional projects in the region is limited at best.  Given the state of the Korean real estate market, Korean E&C companies will be adversely affected from the potential loss of these vital sources of revenues.  Maybe the Hyundai E&C fiasco will calm down as a result, which is perhaps the only good effect of the rising tensions in the Middle East.

Give the Bank of Korea Credit For Resisting Criticism
The Seoul Gyopo Guide has been defending the Bank of Korea's position regarding interest rates:  hopefully, the recent events prove that the Bank of Korea has proved to be a steady hand.  Most of the criticism of the Bank of Korea's most recent policy decision to maintain the current level of interest rates has proven to be one sided at best, and grandstanding at worst.  This criticism has come from bloggers to portfolio managers.  What has been stated here will be repeated:  Korea's economy is fragile because it is not in control of important factors that affect its economy, and as such, the Bank of Korea must be given maximum flexibility.  One aspect of that flexibility is the element of surprise.  Another is the right to ignore the popular press and critics, especially those that do not know or understand the complicated picture.



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