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South Koreans go on spending spree

Models pose with the GM Daewoo Auto & Technology Co's L6 Magunus during a media unveiling at the Bupyung plant, west of Seoul, yesterday. The vehicle is priced at 24 million Korean won (US$19,200). Analysts are concerned that a high rate of spending by consumers may hurt the economy in the long-term. PHOTO: AP

Cho Eun-young paid more than US$10,000 to send her two daughters on a four-week English-language course in Los Angeles in August. She may shell out thousands more in December.

"It's a lot of money, but I may send them to New Zealand for winter vacation," said Cho, a 39-year-old homemaker. This time, she said, she might accompany her 10 and 12-year-old daughters so she can shop and sightsee while they take classes.

South Koreans, flush with cash as economic growth accelerates, are increasing overseas travel and spending more when they get there. The South Korean won's 9.2 percent gain against the dollar this year is boosting their purchasing power in other countries. Cho's daughters were among a record 773,908 South Koreans who went abroad in August, a fifth more than a year earlier.

The overseas spending boom has a downside: The US$2.8 billion it drained from the economy between January and September -- more than triple the amount a year earlier -- may result in a current account deficit next year, the central bank estimates. That could weaken the currency, stoke inflation and raise investors' concerns about South Korea's creditworthiness.

"I'll be worried if we get significant deficits persistently in 2003," said Desmond Soon, who helps oversee about US$75 million in Asian securities, of which South Korean bonds make up about a third, at Pacific Asset Management Ltd in Singapore.

"Lending to a country with a current account deficit is like lending to a person whose income is less than his expenditure."

It's been just five years since the Asian financial crisis pushed South Korea's government to the brink of default. The won's collapse in 1997 triggered a yearlong recession and forced South Korea to seek a US$57 billion bailout from the IMF.

The IMF has said another crisis is unlikely, and South Korea's expected 6 percent economic growth this year would be among the fastest in Asia.

A deficit in the current account -- which tracks all money and goods flowing in and out of the country and is one of the broadest gauges of a country's financial health -- may threaten that growth by weakening the won as more money leaves Korea than comes in.

That would make imports more expensive, pushing up costs for companies that buy raw materials overseas such as Samsung Electronics Co, the world's biggest maker of computer memory chips, and oil refiner SK Corp.

Rising prices may force the central bank, which has already said inflation is a threat, to raise interest rates from near record lows. Additional overseas borrowing by the government would add to foreign debt that rose for a seventh month in September.

"It's not a healthy sign for spending to keep rising and outweigh what's coming in," said Lim Jiwon, an economist at JP Morgan Chase & Co in Seoul.
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