NABO Economic Trends & Issues (No. 68)
I. Economic Trends
Recently, the Korean economy has witnessed a steady increase in exports, but the recent economic recovery is slowing with low employment rates and declining economic indicators. In May, although exports recorded a double-digit increase, the number of newly employed was still under 100 thousand, with economic indicators also appearing to decline. Consumer prices in May recorded a 1.5% increase yoy as increases in agricultural, livestock and fisheries products were subdued, while core inflation increased by 1.4%. The won-to-dollar exchange rate increased with heightened volatility as the capital flight from emerging economies suggests a potential economic crisis. Treasury bond interest rates (3-year maturity) increased in accordance with increases in US treasury bond interest rates.
Ⅱ. Characteristics and Implications of Manufacturing Average Operation Ratio Trends in Major Countries
The Manufacturing Average Operation Ratio (MAOR) of major countries worldwide has recovered rapidly from the global financial crisis and European fiscal crisis, returning to normal. However, in Korea, the ratio failed to return to its long-term average (78%) and continued to decrease since the recent economic slump. The cause appeared to be weak performance of certain sectors, specifically miscellaneous transportation equipment such as shipbuilding, machinery equipment, electrotechnics and electronics (excluding semi-conductors). Although the stable correlation between the manufacturing operation ratio and real GDP growth rate in major countries has been dramatically weakened since the global financial crisis, the relation between the pro-cyclical cause of the two factors appeared to remain stable. Therefore, after taking into account trend-based factors, this must be utilized as a key economic indicator for assessing economic conditions. A decline of the manufacturing operation ratio could become an obstacle to increasing production capacity in the future. It is necessary to increase the operation ratio by enhancing industry competitiveness and reducing overcapacity by restructuring, moving toward proactive readiness for global industry demand and technology advancements.
Ⅲ. Role of Korean Corporate Investors with regard to ESG Investing
ESG investing refers to an investment method utilizing non-financial information such as environmental (E), social (S) and governance (G) indicators, in addition to financial information (information contained within financial statements). Should ESG investing become widespread, individual investors would gain new means for managing non-financial risks. If corporate investors actively manage non-financial risks, their mid-to-long term management performance would improve and the nation’s overall non-financial risks could be reduced. When comparing 2017 country-specific ESG scores, Korea stands at 58.3, which is lower than the OECD average score, 73.7. Korea can thus be assumed to have higher non-financial risk. Since Korean corporate investors are passive towards utilizing ESG investing strategies compared to foreign investors, Korean corporate investors must be encouraged to look beyond short-term performance and accept ESG investing strategies. Urgent efforts are required to expand the scope of fiduciary duties, accelerate the introduction of the Stewardship Code, the expansion of corporations’ disclosure of non-financial information and other measures. In order for beneficiaries to understand corporate investors’ESG investing indicators, they must 1) provide credible, complete and comparable information; 2) fine-tune the information disclosure standards regarding the content, reason and method of corporate investors’exercising of voting rights; and 3) standardize the content and format of the non-financial information disclosed by corporations.