South Korea warned of financial market turbulence

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Sunday, October 22 2:18 PM SGT

South Korea warned of financial market turbulence SEOUL, Oct 22 (AFP) - Drastic liberalization of South Korea's foreign exchange market could cause another crisis due to the country's high short-term debt and sagging stock market, a state think tank has warned.

South Korea has promised to speed up foreign exchange transaction reforms from Janaury 1 under an agreement with the International Monetary Fund (IMF).

The program would place South Korea among the most liberalized currency markets within the Organization for Economic Cooperation and Development (OECD), a club of major economies.

South Korean analysts worry, however, that the foreign exchange market will be exposed more to speculative transactions.

"Rapid downturns in the economic climate and uncertainties in the stock market would naturally create the risk of a sudden and massive exodus of foreign funds," the Korea Center for International Finance (KCIE) said in a report to parliament last week.

In the worst case, it warned South Korea could plunge into a second foreign exchange crisis if foreigners redeem short-term debts in a short time frame or pull out of the volatile stock market.

Foreign holdings in South Korea's total stock market capitalization now stand at 29 percent, compared to 14 percent in Japan and 10 percent in Taiwan.

The state research institute urged the government to prevent possible panic attacks on the won by reducing short-term liabilities and increasing foreign exchange holdings.

Financial officials have remained optimistic as the government has plenty of financial muscle, along with abundant foreign currency deposits at domestic banks.

But there are already signs of growing instability as the country's economic reform drive is at a crossroads.

South Korea's foreign debt rose to 142.1 billion dollars at the end of July. Short-term debt grew to 47 billion dollars. Foreign currency reserves declined slightly month-on-month to 92.35 billion dollars in mid-October.

"The foreign exchange liberalization will increase exposure to highly speculative institutions, and the increased level of funds remitted overseas will hamper the nation's current account balance," Hyundai Research Institute's Chung Heui-Shik told the Korea Herald, an English daily in Seoul.

In a bid to reduce the risk of of a fund exodus, the government decided last week to raise the deposit protection ceiling to 50 million won from 20 million won, starting next year.

Analysts, however, said the hiked ceiling would not stop depositors transfering their money from local banks to safer institutions abroad.

"The higher ceiling reflects the fact that the government cannot afford to push for the initially-set 20 million won ceiling because of the slow pace of corporate and financial reforms," said Indosuez W.I. Carr Securities' Yoo Jeung-Surk.

South Korea made a dramatic rebound from a crisis that forced the country to take a 58-billion-dollar IMF bailout in late 1997.

But the banking sector still has huge non-performing loans, which will require additional state funds on top of the 109 trillion won (97 billion dollars) already pumped into its restructuring.

The state-run Korea Development Institute predicted the growth of gross domestic product would ease from 8.9 percent this year to 5.4 percent next year.

"However, the possibility of a sharp economic downturn is not ruled out in the event financial instability is prolonged due to slow restructuring," it said.

http://asia.dailynews.yahoo.com/headlines/business/article.html?s=asia/headlines/001022/business/afp/South_Korea_warned_of_financial_market_turbulence.html

-- Carl Jenkins (Somewherepress@aol.com), October 22, 2000

Answers

The South Korean and Taiwan economies are the two in Asia most likely to go bonkers. In Taiwan there's Samsung Electronics, and in Taiwan the biggest specialized chip manufacturer in the world. Woe be unto us if these two giants go belly up.

-- Wayward (wayward@webtv.net), October 22, 2000.

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