South Korea - Second time around

Oct 23rd 2008 SEOUL From The Economist print edition Shock, denial, anger and a massive bail-out for good measure OF ALL the Asian countries worst ravaged by the regional financial turmoil of 1997-98, South Korea has come closest in recent weeks to seeing history repeat itself—not as farce, but as renewed financial tragedy. As its stockmarket has slid downhill and the currency, the won, has fallen by nearly 30% this year, the government has been telling all-comers that the economy is sound and the banks liquid and solvent. Its officials have blamed their troubles on the ignorant or malicious refusal of foreign analysts to believe them. Yet on October 19th the government announced a $130 billion rescue for Asia’s fourth-largest economy. Of this, $100 billion is in the form of guarantees for foreign-currency debts. Another $30 billion—about one-eighth of the country’s foreign-exchange reserves—was to be available to banks suffering a drought of dollars. It followed this up two days later with a promise to spend 12 trillion won ($9.2 billion) to help the building industry—for example by refinancing debts and buying unsold houses. The president, Lee Myung-bak, described the overall economic situations as “more serious” than in 1997, because of the global sweep of the crisis. The government had already appealed to the grass-roots patriotism that helped South Korea through the late 1990s: cutting back on energy bills; buying local products; and surrendering any dollars left over from overseas jaunts. Mr Lee and his officials, however, are quite right that the economy is on a much sounder footing than in 1997. Banks are better capitalised, big companies less indebted and reserves of foreign exchange bigger than all but five other countries’. The economy has been growing solidly for a decade. Even after the recent buffeting, analysts still expect GDP to grow by more than 4% this year, and by 2.5-3.5% in 2009. That is nowhere near the 7% growth President Lee promised at his inauguration in February, but in the current doom-laden climate it looks positively robust. One reason for this relative optimism is the shipbuilding industry, one of South Korea’s great success stories. Yet it is also one cause of the financial stresses. There has been a sharp rise in foreign debt. More than one-tenth of the rise is in down-payments for ships still being built, which appear in the accounts as trade credits. And around half of the increase in short-term debt comes from banks hedging their exposure to purchases of shipbuilders’ dollar receivables in the forward market. That helps explain the way in which the global credit crunch first made itself felt in South Korea—in a shortage of dollars for the banks. Moody’s, a credit-rating agency, estimates that South Korea’s banks rely on foreign sources for 12% of their funding. As inter-bank markets worldwide clammed up, they began to look vulnerable. Standard & Poor’s, another rating agency, this month put seven of them on a “watch-list”, because of the pressure they faced. The won itself has been battered as foreign investors have fled Korean shares and bonds. Its decline also reflects the current account’s fall into deficit as the cost of South Korea’s oil and other commodity imports soared earlier this year. The government rescue stemmed the tumble in the won and the stockmarket only briefly. As elsewhere, financial catastrophe seemed to have been averted. But also as elsewhere, traders knew that the impact of the market turmoil on the rest of the economy was only beginning to be felt.