South Korea Scrambles to Reverse Its Economic Slide
Hwang Eun Young, 41, a front gate security guard at a Kia Motors Corp. factory, has seen a big chunk of his life savings disappear in the financial crisis now buffeting his firm and all of South Korea.
“I figure I’ve lost about 7 million won [roughly $6,100],” said Hwang, who like all Kia employees owns stock in the firm as part of his retirement plan. “I bought stock at 24,800 won, and these days it’s worth less than 7,000 and is still going down.”
Rescued from bankruptcy last month in the largest corporate bailout in Korean history, Kia is both a key victim and a major cause of the downward spiral that has brought this country to the brink of economic collapse.
When Kia, South Korea’s eighth-largest conglomerate, stopped paying creditors this summer, it triggered a chain of events that led to crashing stock prices, a plunging won, the dismissal Wednesday of the finance minister and a wild scramble by the government to find a way to reverse the downward slide.
If it fails to quickly stabilize the situation on its own, South Korea may have no choice but to turn to the International Monetary Fund for a bailout, a humiliating option for the world’s 11th-largest economy.
But because of its size, South Korea’s problems pose a far greater threat to neighboring Japan and the entire global economy than what has already been seen this fall from Southeast Asia’s economic instability. A wave of currency devaluations that began in Thailand in early July triggered stock market crashes around the world last month and contributed to the current troubles here.
Foreign banks alone have an estimated $200 billion of loans or investments in South Korea, which means that if large-scale defaults were to occur, the effects could ripple around the globe.
For example, it could lead to short-term credit crunches or sharp losses for overseas institutions owed money by Korean firms unable to make payment. More broadly, investors’ fears that South Korean loan defaults could worsen the already-severe bad loan problems of Japanese banks is one cause for the recent volatility in Tokyo stocks--and thus in the world’s other leading stock markets, notably Wall Street.
About $67 billion of Korean foreign debt is due within the next 12 months, including about $20 billion that matures in December.
Acting just hours after his appointment, new Finance Minister Lim Chang Ryul released a financial package late Wednesday that promised to triple to $10 billion a government fund aimed at helping troubled financial institutions merge and clean up their bad loans.
In a step toward greater financial liberalization, the government also raised the daily limit on fluctuations in the won’s exchange rate to 10%. The previous limit of 2.25% slowed the won’s fall this week--the limit was reached on three consecutive days.
Early today, the first day under the expanded limit, it took just 15 minutes for the won to tumble the maximum of 10%, to 1,139 for each dollar. That makes the won worth about two-thirds its value just six weeks ago.
The government also promised to fully protect depositors in the event of bank failures.
Analysts viewed the measures as positive steps but insufficient to assure a restoration of confidence.
“Whether Korea should take an IMF bailout loan will have to be decided on the basis of the effect these measures have on financial markets,” said Lee Sang Kwon, deputy manager of Ssangyong Securities Co. Ltd. “If these measures prove ineffective, then the government will have to ask for an IMF bailout immediately.”
South Korea’s troubles are rooted in a string of corporate failures this year that led to ballooning bad loans at the nation’s banks. Banks responded by tightening credit, which led to more company bankruptcies and more bad loans. In recent weeks, foreign investors have fled, the currency has crashed, Korean firms have raced to buy dollars to pay back foreign debts, and prospects for economic growth have turned dismal.
Including Kia, which stumbled under $10.3 billion of debts, seven major South Korean conglomerates have financially collapsed this year.
Kia was rescued with a $760-million bailout that gave the state-owned Korea Development Bank a controlling equity stake in lieu of loan repayment, in effect nationalizing the country’s second-largest auto maker.
But even with the rescue, the ability of creditors to quickly recover money they had lent to Kia was limited. That further reduced the availability of credit in the economy, worsening the downward spiral, analysts say. Total bad loans burdening the banking system are now estimated at up to $60 billion.
Most fundamentally, South Korea’s troubles have arisen because in recent years, the country opened itself up to much freer competition among both domestic and foreign firms in the sale of finished products but failed to take corresponding measures to reduce the cost of manufacturing, said Lee Hahn Koo, president of the Daewoo Economic Research Institute.
That left more and more South Korean firms priced out of markets both at home and abroad.
Now, belatedly, changes that benefit manufacturers are also taking place, Lee said. Many Korean companies have adopted leaner structures. Unemployment is up, putting wages under downward pressure. The large number of bankruptcies that have already occurred should eventually push down interest rates. And the government, he said, is serious about deregulation that could decrease transportation and distribution costs.
“The overall cost structure is becoming better, so we can expect companies’ profits to be better in one or two years,” Lee said.
But unless the government takes effective action to break the current “vicious circle” and restore the confidence of foreign investors, the downward spiral could continue, he added.
Lee predicted that economic growth will drop from an estimated 6% this year to somewhere between 3% and 6% next year, depending on what policies the government adopts. That would be far below the growth rates South Koreans have grown accustomed to--and could bankrupt companies that are overextended with too much debt.
But for some companies, the sharp devaluation of the won may mean that the worst has already passed.
Lee Chung Koo, chairman of Unix Electronics Co. Ltd., a manufacturer of hair dryers and electric hand-held massage equipment sold primarily in the domestic market, said that after three years of stagnation, he expects sales to jump by about 15% next year and profits to rise by a little less than half that amount.
Credit for the improved outlook, he said, goes mainly to the won’s devaluation, which raises the price of imported foreign items that compete with his own products.
The weaker won should help his exports too, he said.
Other Korean manufacturers are also pinning hope for the future on expanded exports. A cheaper won not only makes South Korean products more competitive abroad but also more profitable at home.
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Chi Jung Nam of The Times’ Seoul Bureau contributed to this report.
