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South Korea and the global financial crisis





Wed, Dec 3 02:20 AM





The Republic of Korea (South Korea) has recently taken proactive measures to cope up with the implications of American financial crisis, which has become global in nature. It is said that all the countries which are closely linked with the American financial system are going to be severely affected by it. Even if Richard Murray, the IMF's Pacific region director, assures that South Korea is much better positioned to weather the current economic downturn, there are apprehensions expressed about the impact of crisis on South Korea.





A closer look at the South Korean economic fundamentals makes it obvious that there is more fiction and fewer facts in most of the formulations of doomsday sayers. It is necessary to keep economic fundamentals central to any predictions about the impact of this crisis on South Korea. Basically, some recent problems of the South Korean economy could be attributed to two other reasons, which have no direct correlations with the American financial crisis. The first is an unexpected surge of global oil prices in the mid-2008. Korean expenditure on the import of crude oil reached up to $17.7 billion and it got reflected in increasing current account deficit of the country. As of August 2008, the current account deficit of the country reached around $12.6 billion. However, after the price of crude oil has come down around 30%, there is a strong probability that the current account deficit of Korea would improve significantly. The second source of the problem is unreasonable doubts over the health of the Korean economy. Thus, it is important not to overlook the positive trends to arrive at a more comprehensive understanding of the impact of the crisis on South Korea.





It is inappropriate to understand the impact of present crisis on Korea by comparing it with the 1997 financial crisis as both are quite different in their origin and nature. Whereas, the 1997 crisis was a product of domestic financial mismanagement, the present crisis is evidently exogenous in nature. If we compare the economic indicators of South Korea during the 1997 crisis and now, it is obvious that both are quite different. In the first scenario, Korean foreign reserve was only $8.4 billion, but it has now climbed up to $240 billion. In 1997, the South Korean total external debt to foreign reserve was 1,957%, which is now 173% only. In addition, in the 1997 crisis, the South Korean Bank's Non-performing Loans (NPL) ratio was 6% which in now less than 0.6%. Unlike in the 1997 crisis, most of the economic fundamentals of the Korean economy are quite sound. Now, Korea has less than one third of its foreign loans as short-term and it has a comfortable $240 billion of foreign reserves to deal with any unforeseen situation.





On the basis of these strong fundamentals, it could be said that though South Korean economy would get affected by the American financial crisis, the effect could not be compared to the 1997 crisis. An export-led South Korean economy would undoubtedly face problem because of the shrinking American and European markets but the North America and EU constitute only 13.3% and 15.1% of the South Korean export market. In contrast, China, Asean, Japan and other countries constitute 22.1%, 10.4%, 7.1%, and 19.1% of Korean export market respectively. Furthermore, the basket of South Korean export is also quite diversified. In the wake of crisis, the South Korean export to the US and EU would get affected, but the crisis would propel South Korea to concentrate more on intra-regional trade and explore new export destinations. It is interesting to mention that the South Korean export to China has grown despite the recent slowdown of China's exports. The South Korean export to China expanded 33.7% in the second quarter of 2008. China has been working to boost its domestic demands and it would be a good opportunity for Korea to capture upcoming market in China. Recently, South Korea, without being unnecessary perturbed by the crisis, has set an ambitious target of increasing its exports to $500 billion by 2009.





The doubts about the South Korean external debt, banking and housing sectors are also not sustainable. For example, the external debt is around $420 billion but $152 billion of it is risk-free. Similarly, South Korean banking sector has moderate loan growth in 2008 with a continued low level of delinquency. Also, South Korean banks do not have currency mismatch problem which was there in the 1997 crisis and South Korean housing sector has maintained balanced growth rates supported by robust mortgage regulations in recent years.





When there is crisis of faith in market, genuine or imagined, it is the responsibility of the state to intervene and provide assurance about the economic health of the country. South Korean government has taken various proactive steps to curb potential negative fallouts of the crisis. On October 19, the go|||too long so did not bother.