Why South Korean is Vulnerable

http://chinese.wsj.com/gb/20081030/ecm133736.asp?source=channel

--exports decline

--overdebted due to shipbuilding building business

sits on the world's sixth-largest pile of foreign currency -- $240 billion

Since 1997-98, South Korean banks built up strong capital-solvency ratios and fended off bad assets. Loan-to-value ratios on property loans are extremely low at 47%, and the delinquency ratio of business loans is 1.5%.

But in 2006 and 2007, South Korean consumers began withdrawing savings to invest in brokerage accounts tied to the country's booming stock market -- some for the first time. Banks also aggressively expanded lending to small businesses last year, which boosted profits. At Shinhan Bank, the nation's third-largest, loans to small and midsize businesses grew 47% from the start of last year through the middle of this year, compared with 36% growth in the bank's overall loan portfolio.

Meanwhile, South Korea's $420 billion in foreign debt as of June, which also alarmed global investors, was built up in large part by the success of the country's shipbuilders. Last year, South Korean companies, including Hyundai Heavy Industries Inc. and STX Shipbuilding Co., received 40% of new orders by tonnage for ships globally.

Because shipbuilders take orders for ships that will be built in three or four years, they hedge most of their orders to guarantee that they get present value for them. About 36% of the country's debt is backed up by export payments to be received when ships are delivered. An additional 19% is owned by foreign banks in Korea, and analysts debate whether this should be considered part of the country's liability.