1. This statement provides additional information that has become available since the circulation of the staff report. This information does not change the thrust of the staff appraisal.
2. Recent data suggest that domestic demand growth is slowing, consistent with the macroeconomic assessment in the staff report:
Bank lending to households declined in January—typically a month with low lending—reducing the year-over-year rise to 35 percent from around 50 percent in mid-2002. Early reports suggest a moderate pace of bank lending to households in February.
Consumer and business confidence indicators have declined or remain at relatively low levels in recent months as geopolitical uncertainties have dampened the global economic outlook. Tensions with North Korea may have exacerbated this weakness.
In January, wholesale and retail sales increased 4.5 percent (y/y), the same relatively slow pace as in 2002 Q4, and estimated facility investment contracted 7.7 percent (y/y).
Industrial production growth slowed to 3.6 percent (y/y) in January, from 9.5 percent (y/y/) in December 2002, mainly due to special factors boosting production in January 2002 and reduced working days during the Lunar New Year.
In February, the headline CPI rose by 3.9 percent (y/y), reflecting higher oil prices, while the core CPI rose by 3.0 percent (y/y)- Housing prices fell slightly in January, easing overall housing price inflation to 13½ percent (y/y).
Merchandise exports and imports each rose 27½ percent (y/y) in January 2003, led by a 76½ percent (y/y) rise in exports to China and a 54 percent (y/y) rise in semiconductor exports.
3. Heightened tensions with North Korea have so far not had major impacts on financial markets, although there are reports that the tensions may have contributed to delays in investment:
In mid-February, Moody’s changed the outlook on Korea’s sovereign rating from positive to negative because of heightened security concerns stemming from North Korea’s nuclear weapons program. Partly in response, Korea’s sovereign bond spread has risen by about 20 basis points since end-2002 to 119 basis points on February 27, 2003, similar to its average level in 2002.
The Korean won has appreciated against the U.S. dollar by ¼ percent from end-2002, to reach won 1,193.7 per U.S. dollar on February 28, 2003.
The tensions have been reflected in increased volatility in equity prices relative to regional indices. The level of the KOSPI index relative to the MSCI Asia index, however, is not significantly below its average level in 2002. Inflows of foreign portfolio investment continued during October-January, although there were small outflows in February.
4. The 2002 fiscal surplus was somewhat higher than estimated in the staff report and the authorities have recently adopted some stimulatory fiscal measures. The preliminary 2002 consolidated budget balance was a surplus of 2.6 percent of GDP, which is 0.4 percentage points larger than estimated in the staff report, due to smaller-than-estimated spending. Measures to respond to rising international oil prices were recently adopted, including a reduction in tariffs on crude oil from 5 percent to 3 percent and steps to economize on oil consumption. The government is also planning to frontload spending within 2003, with 52 percent of budgeted expenditure to be implemented before June.
5. The Financial Supervisory Service (FSS) has recently announced a reorganization aimed at more effective supervision of the rapidly growing derivatives market. It has established a dedicated team responsible for derivatives market supervision, which will aim to strengthen the monitoring of derivatives markets and to encourage financial institutions to improve risk management practices in derivatives operations.
6. Recent reports indicate that the economic situation in North Korean continues to deteriorate. Market prices for staple foods have reportedly surged by as much as 400 percent since July 2002; and the black market exchange rate is reported to be about 700 per U.S. dollar compared with about 200 in late 2002. Food shortages are acute, with the UN’s World Food Program—which feeds 6.4 million people or 28 percent of the population—estimating an 86 percent shortfall in the total food requirement to implement its program. Power supply has fallen from already low levels, with reports of a 30 percent drop in electricity available for heating.