Saturday, October 18, 2008
South Korea braces for crisis fallout (11:16 a.m.)
SEOUL, South Korea - As financial turmoil spreads around the world, South Korea may prove to be one of the most vulnerable countries in Asia.
With its banks facing potential trouble, its currency and stocks reeling and consumer debt on the rise, the country's woes have stirred memories of the regional economic crisis that struck it more than a decade ago.
Now, amid criticism that officials have done too little too late, government leaders are racing to restore confidence in the country's economy.
On Friday, the government held an emergency meeting to discuss how best to respond to the market turmoil. In recent days, officials have sought to reassure their fellow citizens that another collapse isn't in the making.
"Korea's foreign exchange reserves amount to US$240 billion, all of which are readily available at anytime," President Lee Myung-bak told the nation in a radio address Monday. That figure was 27 times larger than when the Asian financial crisis hit the country in 1997, he said.
Currency reserves can be wielded for varied purposes, including to defend the value of a country's currency and generally shore up the financial system.
Despite Lee's reassuring words, some analysts have sounded alarms about South Korea, most notably its banks.
They say the global credit crunch is making it hard for local banks to acquire dollars and other foreign currency needed to refinance activities such as foreign-denominated loans to domestic companies and cite personal debt levels as a cause for worry.
Also, the country's broadest measure of trade - the current account - is expected to record an annual deficit for the first time in a decade, meaning South Korea is spending more on goods, services and investments from overseas than it sells abroad.
South Korean stocks have been no exception to the worldwide rout in equities spurred by the U.S. credit meltdown, falling 38 percent this year. They had already dropped 22 percent even before the collapse last month of Lehman Brothers Holdings Inc.
South Korea's currency was also having a bad 2008 even before declines against the U.S. dollar accelerated amid the crisis. The won has plummeted almost 30 percent this year against the dollar and had its worst single day - a drop of 9.7 percent Thursday – since Dec. 31, 1997.
"Ongoing stress in the Korean financial market seems to be a mixture of domestic credit crisis, balance of payment crisis and global credit crisis," Citibank Korea economist Oh Suk-tae wrote in a report last week.
Standard & Poor's Ratings Services said this week it may downgrade the credit ratings on some of South Korea's biggest banks, citing "a more than 50 percent chance that the global liquidity squeeze could threaten Korean banks' foreign currency funding."
"We expect the stress on the Korean financial system to be prolonged," S&P analyst Kim Eng Tan said Friday.
South Korea, where consumer debt levels soared in 2003 after the government encouraged credit card use to spur the economy, has again been seeing rising levels of personal red ink.
National Information & Credit Evaluation Inc., a credit information provider, said in its quarterly magazine that an index monitoring South Korean household debt was at 75.1 in June, down from 87.2 the year before. A reading below 80 implies "caution required."
Some analysts, such as Alaistair Chan of Moody's.com, call "overblown" any fears that South Korea could fall into a full-fledged meltdown such as the 1997-98 Asian contagion, citing its "vast foreign reserves."
Those reserves, while indeed formidable, have been falling as the Bank of Korea, the central bank, is believed to have been using them to try and stem the won's declines by purchasing dollars.
S&P expressed disappointment Wednesday that "no wide-scale government measure has been announced" such as "blanket deposit guarantees and underwriting of interbank lending risks" implemented in other countries.
Minister of Strategy and Finance Kang Man-soo said Friday after the special meeting that the government would announce what he called "pre-emptive, decisive and sufficient" measures Sunday.
The government has maintained that its banks are healthy and says the country's situation is not dire.
"Korea's banking sector is sound in terms of asset strength, capital adequacy, profitability, and other soundness measures," the Financial Supervisory Service said last week.
Besides its hefty foreign currency reserves - the world's sixth largest - the government says other factors are in its favor such as manageable corporate debt levels and an expected turnaround in its current account deficit as early as this month.
Goldman Sachs economist Kwon Goohoon says South Korea's accumulated budget surpluses since 2000, low public debt and sharply falling commodity prices are all pluses.
Nevertheless, he expects the economy to slow to annual growth of
3.9 percent next year, the lowest since 2003.
Tom Byrne, a senior vice president and regional credit officer with Moody's Sovereign Risk Group, said Friday that South Korean banks were under "severe pressure," but expressed confidence the government's reserves were adequate.
"At the same time, the unprecedented turmoil in the global financial system makes seeing through this exceptional crisis, let alone the expected downturn in the economic cycle, very difficult," he said. (AP)
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