Korea fears new economic meltdown

By Jennifer Veale, Seoul

After engineering the fastest economic turnaround of the crisis-ravaged Asian countries, South Korea is awash with speculation that there could be a second economic meltdown because of the worsening current account deficit and slowing economic reform.

In the first four months of the year, Korea's trade surplus dwindled to one tenth of that for the same period last year. From January to April it stood at $US770 million compared with $US7.79 billion a year ago. Short-term debts have also increased by more than $US2 billion from $US41.3 billion in February to $US43.4 billion in March.

Both the International Monetary Fund and Moody's Investors Service have added their voices to economists' in warning that while Korea might not face an immediate crisis, the country is increasingly vulnerable to a severe setback.

Moody's said it was concerned in particular about the state of the non-bank financial sector, namely heavily indebted investment trusts and merchant banks, and warned that it might be forced to reassess Korean bank ratings if there was no immediate improvement in the situation of second tier financial institutions.

Korea's central bank, the Bank of Korea, shared the same sentiments in a new report which said that Korea's economic circumstances were becoming increasingly similar to those in Latin America. Korea's reform drive has slowed considerably over the past six months.

However, analysts and investors are increasingly paying attention to stalled restructuring of the insolvent Daewoo group.

It has been nearly nine months since Daewoo's woes surfaced, yet the future of 12 key affiliates has not been sorted out due to bickering between creditors over loss-sharing ratios. In the meantime, debts are mounting at the group's affiliates.

A weakening stockmarket and the continuing dire condition of investment trusts, which invested heavily in corporate bonds of ailing companies such as Daewoo, is also causing investors to sit up and take notice.

Last week, Seoul moved to prop up the latter, promising to inject nearly 5 trillion won ($779 million) to turn around two ailing companies, which were severely rocked by the Daewoo debacle. And this week, the Government finally conceded taxpayers would likely have to cough up another 30 trillion won to wrap up restructuring of the nation's wobbly financial sector.

So far, the Government has pumped nearly 90 trillion won into the financial sector. However, many economic analysts are yet to be convinced that the Government has a handle on the worsening situation and that it could lack the political wherewithal to thoroughly overhaul the financial sector.

http://www.afr.com.au/content/000517/world/world2.html

-- Carl Jenkins (Somewherepress@aol.com), May 17, 2000