S. Korea Realizing the Politics of Economy

Political uncertainty in South Korea is worsening a mood of economic pessimism that pushed the country’s benchmark stock index to a five-year low this week.

Though the wide-open presidential campaign now unfolding in South Korea marks a major step forward in the country’s maturation as a democracy, the mud-slinging involved is scaring investors, analysts say. Meanwhile, the lame-duck administration of President Kim Young Sam is virtually paralyzed, unable to take effective policy measures.

“Any kind of confusion in politics affects stock prices,” noted Kiyoyuki Nirusako, an analyst at Sakura Research Institute in Tokyo.

The political climate--which includes suspicion that illicit campaign funds have come from well-known corporations whose owners could face arrest--adds to the problems posed by the fact that, said Nirusako, “the actual economy has been awful this year. Many big companies have collapsed or filed bankruptcy.”

Moreover, as politics casts a spotlight on South Korea, investor sentiment is increasingly depressed in almost the entire arc from Indonesia to Japan. The trouble is regionwide, with problems in one country having ripple effects for its neighbors.

Much of Southeast Asia is mired in economic troubles triggered by currency devaluations that started this summer. The Hong Kong stock market has been hit by falling values for the “red chip” stocks of China-backed Hong Kong companies. China’s own stock markets are down in recent months. Disappointing economic statistics sent Japanese stocks to a two-year low on Monday.

The downturn in Asia could lead to a worsening of the U.S. trade balance with this region, as East Asian countries step up their efforts to export to the United States but don’t have so much demand for U.S. products. Although U.S. consumers may benefit from cheaper imports, the trend could put pressure on U.S. manufacturers, corporate profits and stock prices, analysts say.

In coming weeks, the greatest potential for politically induced economic volatility may be in South Korea, as the country heads toward the Dec. 18 presidential election.

“It’s getting to be like both parties are mud wrestling with each other, so foreign investors are hesitating to go into the market,” said Natsuki Takagi, a Tokai Bank economist in Tokyo. “The government should be doing something, but they’re busy with the upcoming election too.”

The roots of South Korea’s current economic troubles lie in a downward spiral that began two years ago, after 40 years of spectacular economic growth.

The Korean economic miracle was built on “maximizing leverage” by having government-backed banks subsidize the country’s manufacturing sector, while industry took advantage of cheap labor and a protected domestic market to build a powerful export machine, said David Kim, head of research at W.I. Carr (Far East) Ltd. in Seoul.

The system depended on rapid growth in production and revenues to meet payments on debt. As growth slowed over the last two years--from 8.6% in 1994 and 9.0% in 1995 to 7.0% last year and an estimated 5.8% this year--more and more firms fell into difficulty.

As the crisis of falling currency values swept Southeast Asia this summer, triggered by the July 2 devaluation of the Thai baht, foreign investors became increasingly wary of other Asian markets too, including South Korea. That has meant that the “crucial” inflow of foreign capital “has trickled off,” said analyst Kim.

Times researcher Etsuko Kawase in Tokyo contributed to this report.

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Korean Stock Skid

Political uncertainly prompted by an upcoming presidential election and slowing economic growth, pushed South Korea’s benchmark stock index to a five-year low this week. A weekly look at South Korea’s stock index since May 31:

Friday close: 585.49

Source: Bloomberg News