April, 16, 2015
Following is the unofficial transcript of a CNBC Exclusive interview with South Korea Minister of Strategy & Finance, Choi Kyung-hwan, conducted in Washington D.C.
All references must be sourced to a "CNBC Exclusive Interview'
Interviewed by Julia Chatterley, Anchor, CNBC
Julia Chatterley (JC): So the Central Bank recently downgraded growth estimates for the South Korean economy, you've front-loaded spending for 2015, what more can you do in terms of fiscal stimulus for the economy?
Choi Kyung-hwan (CKH): Korean economy last year had implemented expansionary macroeconomics and as a result I believe we are seeing some recovery in the market and we will have to keep our eyes on the market during the first half of this year to see how the policy plays out and if required we will provide additional stimulus in the second half of this year.
JC: The Central Bank has also provided stimulus and has taken rates to record lows, but there does seem to be some disagreement – some parts of the board want to see rates lower. Can the Central Bank do more here to support the economy?
CKH: That decision would be by the Central Bank of Korea and this would be an independent decision that they would have to make. As far as the recovery of the economy is concerned, well, there are some different views, so the Bank will have to keep a close eye on the market and see what changes are taking place and accordingly make the changes.
JC: Your biggest export partner is of course Japan and if you look at the relative exchange rate it has increasingly hurt your exporters- I think a 50% appreciation in the Korean won since 2012. If we look around the world there's a fight to weaken currencies. Would you agree that South Korea has been actually very slow to react as far as currency strength is concerned?
CKH: Well, the Korean exports during the first part of this year, we have seen a slight dip and I would say that much of that is actually due to the fluctuation in petroleum price and the many petroleum derivative products which are exported from Korea. And also as far as the exchange rate is concerned, well, yes, it is true that different currencies will have an impact on the Korea's export capabilities and competitiveness. We have seen quantitative easing with Japan resulting in a lower yen and that of course is a factor that is influencing our competitiveness in the world market. However, Korea is of the position that foreign exchange rates should be determined by the market and we let the market decide how the rates should be and in recent years we have seen a stronger dollar and weaker yen and those are some of the influencing factors when it comes to the foreign exchange rate for Korea and the won.
JC: The U.S. Treasury recently complained that the Korean won was in fact too weak, so as you quite rightly said, is that a dollar story and they shouldn't necessarily be complaining about what is going on with your currency?
CKH: Well, yes, I have heard that the Treasury department have made a report to the U.S. Congress regarding the foreign exchange rate of Korea. I should tell you again,emphasizing the fact that Korea allows the market to determine the Korean exchange rate and as far as the forecasts are concerned, the U.S. is expected to increase its interest rate and with the interest rate hike, I expect that other currencies such as yen will weaken vis-à-vis the U.S. dollar. And as to the account surplus, well, 100% of the petroleum that Korea has are actually imported from overseas and when the petroleum price drops 30 – 40%, this would have a direct impact on the account surplus, on the positive side for Korea and as far as the exchange rate is concerned, when we consider the U.S. market and the account surplus with the U.S., I don't believe that this was the determining factor. There are other variables which more heavily weighed.
JC: So you don't think this is a "back-door policy" to support Tim Cook and Apple and sell more Apple products than Samsung?
CKH: That actually would be very…on the product competitiveness of Samsung and Apple. In the short-term perhaps the exchange rate may have some influence, however, as far as the mid-term and long-term outcomes are concerned, it's their product competitiveness.
JC: So what about competitiveness then for South Korean companies? We saw the operating earnings drop double digits last year, they're getting squeezed as far as the automakers are concerned by competitors in the U.S. and in Europe…you look at the smartwatch, the watch developers, they're also getting squeezed by low-cost production from China in particular…how do you help your companies to compete cause they can't cut costs indefinitely?
CKH: It's true,Korean companies are being challenged by Chinese companies, especially in areas where Korea used to have much strength. And as such, Korean companies have to try even harder and one area that Korean companies are trying harder is the Research and Development area, we are pursuing accelerated innovation approaches and further when it comes to government, we are trying to help these corporations to be more competitive and one way we are doing that is by restructuring the labour market in sort of a reformation…and we are trying to supply more productive manpower that is available to the corporations. Further, the government is seeking to reform the regulations so that the corporations can be more, more competitive.
JC: But that comes back to seeing a recovery for these corporates cause they're not going to invest in the kind of research and development that they need, they're not going to hire more people, they're not going to raise dividends or raise wages if they don't see signs of recovery and that brings us back to the economy.
CKH: The Korean economy is growing at about mid-3% and compared to many of the OECD countries,this is actually rather a solid figure, however, when you look at the Korean economy, I believe there's much room for further growth and that is why we feel that government and the corporations alike, that there could be a better recovery than where we are now. And in order for that to occur, we are not only looking at the export market but also the domestic market and we are hoping to grow and we are intending to grow in both the export and domestic markets so that there would be inducement for corporations to invest further.
JC: It's also an external demand story though there balancing also that we're seeing in China for example…I want to shift now to their economy too. How concerned are you about the moderation that we're seeing in China's growth and its impact on South Korea?
CKH: China is an important partner to Korea. Korea exports about a quarter of its exports to China and any slowdown of the Chinese economy can only mean a major impact on the Korean economy as well. Thus far, Korea has been exporting intermediate goods mostly to the Chinese market but we are aiming at exporting more final consumer goods to the Chinese market so that their domestic market can also be a part of our export strategy.
JC: So you're not concerned by the moderation that we're seeing? You still see potential, vast potential?
CKH: It doesn't seemlike China would be able to anticipate the high growth of 10% or more. It would be harder going into the future anyway and as the Chinese call it, it would be a "New Normalcy" that they would be seeking and as for Korea we would be looking to the Chinese domestic market aimed at the domestic consumption that they would have and I need to remind you that Korea actually is rather strong when it comes to final goods and also given our geographic advantage, I think we have possibly an upper hand when it comes to the domestic market of China.
JC: I want to talk to you about the Asia Investment Fund. South Korea's obviously signed up. Do you see this as a pivotal moment for China and their geopolitical influence both in emerging markets and potentially in Europe too?
CKH: Well, the Asian Development Bank had come up with a focus stating that in Asia when it comes to infrastructural investment there would be about $730 billion on an annual basis to be invested, however, as you know, ADB and World Bank, they do not have enough resources to finance this infrastructure product and as such, this is a gap which AIIB could fill and it appears that's where we are headed with AIIB. However, there remains many issues, such as the governance and safeguards, and these are some of the areas that we need to ensure that AIIB fulfills, and it's not clear at this point how the institution will shape out but I know Korea and United Kingdom, Australia and other partners are going to be working very hard, closely, to make sure that there is transparency in this institution and that AIIB will become Asia infrastructure funding institution that can do its job as it has been chartered and in that regard, Korea will be – Korea is – committed in providing a lot of the support we can to the institution.
JC: Fifty-seven founding members, in fact. Was it a strategic mistake by the United States not to join?
CKH: Well, that's a very sensitive topic and I suppose in the initial stages the U.S. government did not have the assurance when it comes to the new institution, in particular regarding governance, so maybe that's why there was initially a negative reaction to the institution but we need to be mindful of the reality that we are living in. In the old days we had the U.S. taking up about 40% of the global GDP but we are at a juncture where the U.S. GDP accounts for less than 25% of the global GDP and there are changes taking place and when these changes do take place there has to be some adjustments that must be made and we all need to work together to make sure that these adjustments are properly made. For example, U.S. interest rate policy, whenever there is a change in the U.S. interest rate, the emerging markets actually would be very vulnerable and their economies would be affected heavily by the U.S. policy,and this actually could result in financial crisis in certain occasions and that's why we need to have a safety net, for example, like currency swap or other mechanisms and in this regard I believe the IMF quota needs reformation, I think the U.S. government could take a more proactive approach towards that and when the U.S. is able to adjust then perhaps we could…we don't have to see these other institutions pop up anymore.
JC: So what you're saying is they've brought it on themselves by not being more open to allowing greater voices at the table?
CKH: I don't want to go there except that there are global changes taking place and this is part of a natural flow of events.
JC: Welcome to the New Normal! Is it right also that North Korea is excluded?
CKH: Well according to the AIIB charter, a candidate for membership in AIIB would be a previous, an existing membership with ADB and World Bank and North Korea is not a member of ADB nor World Bank. As such North Korea would not be a candidate at this point.
JC: And not deserving of investment and funding?
CKH: Well I'm saying that that's the candidate's requirement but when we have a general session and when we make a determination as to the country of operation, where we are going to invest in, then North Korea could be a recipient country.
JC: That was a difficult question. I want to ask you, to wrap up, about the perception right now of South Korea. There have been some concerns from investors about a scandal domestically about illicit funds paid to an election campaign for the President. I just want to ask you to address some of those concerns and to draw a line under the issue and whether or not it impacts your ability to stimulate the economy and to progress the economy at this stage.
CKH: Well, that is currently under investigation and it's a position taken by one side and even if this were to be a scandal, I don't believe this could impact the Korean economy. The Korean government will persist in its four major reforms and we will continue to implement our economic policy and we will not waiver.
JC: We're seen inflows into the stock market this year after weakness last year. Is the overriding message from you then to investors looking at South Korea here, that you're open for business and there is potential here, investment potential?
CKH: The fundaments of Korean economy are fairly strong and when you compare the fundamentals of Korean economy to those of emerging markets, I believe we are rather differentiated and we are very competitive. And the merits that we have in the Korean market for investment remains there and it's also known that the Korean stock market has not been fully evaluated compared to other markets, so there are much opportunities resident in the Korean market. And also recently, the Korean government implemented a dividend expansion policy and that also attracted more foreign investment. So the market remains fairly robust and attractive and I think that that has been indicated by the recent inflow of investment into the Korean market.
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