ECONOMY-SOUTH KOREA: Humbled Tiger Looks to Uncertain Future

By Suvendrini Kakuchi Reprint | | Print |

Suvendrini Kakuchi

TOKYO, Nov 23 1997 (IPS) - Not too long ago, South Korea was the newest developing country to make it into the club of the developed nations, its reputation boosted by its transition from a military- ruled state into a democratising society.

To many, this ‘tiger’ economy was well on its way to cementing both economic gains made in recent decades, and political strides that came with its first democratic polls in 1987.

But South Korea’s decision Friday to seek a bailout package of some 20 billion U.S. dollars from the International Monetary Fund (IMF), following weeks of financial turmoil in the wake of Asia’s currency crisis, underlines the sudden reversal of fortunes for the industrialised country.

Some say the IMF-led package could balloon to 100 billion dollars. But looking beyond the size of the aid package, Seoul’s decision is by any measure a painful step for a country that has been held up as a model of the Asian economic miracle, and had thus tried to avoid going to the Fund despite its problems.

In a nationwide address Saturday, President Kim Young Sam apologised to South Koreans for “what became of our economy that the world once envied”. He added: “As president, I feel deep regret.” He asked people to pull together, saying “the coming economic restructuring will involve bone-carving pain”.

Seoul newspapers called the decision to go to the IMF a “national humiliation”. As late as two days before Friday’s announcement, Seoul officials had said IMF help would not be needed and it would mean a loss of economic sovereignty.

But realising the need to stop the financial haemorrhage and to do something to restore international confidence, South Korean officials saw they had little choice. “We accepted the advice from the IMF and our friendly nations and we decided to ask for the IMF loans,” Finance Minister Lim Chang-yuel said on Friday.

As was the case with Thailand and Indonesia, which received bailout funds organised by the IMF, South Korea is expected to enter a period of financial restructuring and austerity even as financial analysts predict slower growth, continued depreciation of the South Korean currency, and persistent debt problems.

“The situation is extremely serious, so serious that it is difficult to say when things will be looking up,” said economist Nao Ishizaki of the Institute of Developing Economies, a quasi- governmental organisation.

The financial woes are bound to make things even worse for Kim’s government, which is lurching toward the end of a term already hobbled by political and corruption scandals. South Korea is due to hold presidential elections in Dec 18.

Before deciding to the go the IMF, South Korea had been trying to get the United States and Japan to help with its liquidity problems, worsened by the free fall of its currency, the won, since the government abandoned its defense on Nov 17. The won has lost more than 25 percent of its value this year — 13 percent last week alone.

But little help was forthcoming without an IMF role, and a proposed Asian bailout fund to help countries fight currency speculation fizzled out last week. At one point, Seoul officials pointedly said massive problems in South Korea would affect Japan and the U.S., “so it is in their national interests to help”.

On Friday, Lim said that he believed Japan would “cooperate quite closely” with Seoul, and that IMF funds would be accompanied by similar help from other countries.

For weeks, analysts have been saying South Korea stood next in line in a string of Asian economies hit by a currency crisis that began with sharp devaluation of the Thai baht in July. Since then, the currencies of Malaysia, Indonesia and the Philippines have taken a battering, even as nervous stock markets in Asia and elsewhere swung wildly.

South Korea’s economic crisis has been brewing for some time, not least to a string of corporate bankruptcies that weighed on the banking system. Since January, five major business groups have sought government protection from creditors and their financial woes have deepened a banking crisis by increasing non-performing loans, according to Sangyong Investment and Securities Corp. in Seoul.

Financial experts cite other worries such as the country’s 110 billion dollar foreign debt, two-thirds of which matures within a year. That, and the size of Korea’s economy, are the basis for projections that a total bailout package could well reach 50 or even 100 billion dollars — twice the IMF package for Mexico.

“The bailout will be a huge multinational effort. It could run up to 100 billion dollars given the situation,” Ishizaki said.

There is also speculation about the real state of South Korea’s foreign reserves, which are reported at 30.5 billion dollars but which may be lower now since the government had dipped into them to defend the won.

The liquidity crunch is fueling many other jitters. “We thought South Korea was free from the fiascos in South-east Asia. But that’s not true,” explained Kei Mizuno, an economist who specialises on Asia.

Because Korea is a much bigger player than other South-east Asian countries, its woes are likely to take a greater toll on other economies. As Lim said recently: “If Korea is dragged into a predicament similar to that of South-east Asia, it is very likely to set off even more serious repercussions on not only its major trading partners but on the entire world economy.”

Lim made the remark to stress the importance of getting help from neighbours, but he has a point. A further slide in the Korean won would put pressure on the currencies of Taiwan and Japan, which are South Korea’s competitors for exports.

Beyond that, a downturn in South Korea would affect Japan, the largest foreign lender to South Korea and a major trade partner. If slowdowns take root in South Korea and Japan, two of Asia’s economic heavyweights, their demand for imports from the U.S. would dip. The U.S. is Asia’s biggest export destination.

The first priority for South Korea’s economic team is to employ powerful measures to get dollars to come in. Two days before going to the IMF, Seoul unveiled a reform package that included widening the won’s trading band, and increasing the size of a bailout fund for buying out bad loans from banks.

But this will not be enough without further changes. Still, reforming the banking sector and changing its spending and lending behaviour will be tough.

Early last week, opposition parties blocked the passage of crucial financial reform bills. That fueled questions about South Korea’s ability to take decisive action at a time when it is most needed to contain a potentially serious economic downturn.