'Rain' On My Kimchi... Deep Problems With South Korea


Hold the kimchi... South Korea's exports tumbled by a record 32.8% in January, foreshadowing a deepening slump in Asia's export-driven economies. Shipments fell by the most since figures were first compiled in 1957, and at almost twice the pace of December's 17.9% decline. I don't know about you, but for exports to drop by ONE-THIRD is as big news as it can get, as if Rain died literally. OK, we can understand some of the slowdown from global demand but what are the specifics which is unique to South Korea that caused such dismal business conditions. In fact, South Korea is probably the hardest hit among all Asian countries. Why so bad??? It mainly has to do with the currency.

Heavy investment by the Korean Government in Fannie, Freddie and other US-related agency bonds has left a potentially huge liquidity problem - perhaps $50 billion - in the foreign reserve portfolio. Some believe that Seoul might have no ammunition left to prevent a significant flight from the won. Fruitless currency intervention by South Korea - increasingly desperate-looking verbal and financial measures to fight the market trend - cost more than $30 billion over the last 12 months already and the trend is not abating.

Attempts to prop up the won come as South Korea’s household and corporate sectors are wincing from the pain of high energy prices and inflation. Though energy prices have fallen but the downward adjustments have been slow. A summer of strikes by lorry drivers and mass street demonstrations calling for President Lee to resign reflect rising public concern that the economy is in trouble. The situation has worsen dramatically nearly $10 billion of Korean bonds have matured over the last 8 months, potentially creating vast downward pressure on the won if a large part of that sum immediately flees abroad.

Korea’s foreign exchange reserves stand at less than $180 billion and dropping, it was $247 billion 6 months ago. The International Monetary Fund recommends that emerging market economies should hold nine months’ worth of import cover, which would be about $320 billion.

More worrying is the level of Korea’s foreign exchange reserves relative to its short-term debt ratio. Korea’s debt maturing within a year has shot up to $215.6 billion because of hedging against the oil price. While that is nominally within the 100 per cent coverage by forex reserves deemed necessary, the Fannie and Freddie crisis in the United States raises the question of whether any sense of security is illusory.

A large part of Korea’s foreign reserves are not government bonds but the kind of US-based mortgage-related bonds that once looked so solid. All added up, South Korea's problem is the country’s hefty current account deficit.Things would not have been so bad if foreign investors did not start to flee the country in anticipation of graver problems on the won, and that has exacerbated all problems. Soaring inflation and a legacy of massive borrowings by households add an additional, potent layer of instability.

Analysts predict a rising tide of nonperforming loans, delinquency ratios and bankruptcies and some of the country’s large mutual savings banks are expected to go bust. The global credit crisis basically quicken the process and magnified South Korea's deficit problem.

Faltering exports suggest the economy is headed for its first recession since the Asian financial crisis a decade ago and increases pressure on policy makers to accelerate stimulus measures and interest-rate cuts. Korea's won, the region's worst performing currency last year, slipped 0.9% to 1,392.5 per dollar in Seoul.

Exports to China, the nation's biggest overseas market, tumbled 32.2% during the first 20 days of January. Shipments to the US declined 21.5%, exports to the Europe Union plunged 46.9% and sales to Latin America dropped 36%. Exports to the Middle East fell 7.5%. South Korea has allocated about 140 trillion won ($150 billion) in extra liquidity, tax cuts and spending, and the central bank has reduced interest rates to a record low. South Korea's exports of semiconductors plunged 47% in January from a year earlier, and those of automobiles declined 55%. Sales of ships rose 20%.

Samsung Electronics Co., the world's largest maker of memory chips, liquid-crystal displays and televisions, reported last week its first quarterly loss as the global recession drove down prices. Confidence among South Korean manufacturers remained close to a record low, a central bank index showed last week. A report today may show consumer prices rose by the least in 10 months in January, giving the Bank of Korea room to lower borrowing costs further to spur growth. The central bank cut its rate to a record 2.5% on Jan. 9, the fifth reduction since October. The bank has signaled it's ready to act again when the board meets on Feb. 12. Korean households, struggling with record debt, are losing confidence as unemployment rises and as falling stock and property prices reduce their wealth. Employment dropped in December for the first time since October 2003.

p/s photos: Ayawawa


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