Can Korea withstand impact of ‘perfect storm’?

Can Korea withstand the impact of a “perfect storm” ― a swooning toxic Europe, a faltering U.S. recovery and a slowing China?

Policymakers are trying to be reassuring, pointing to their huge foreign currency war chest and protections against massive capital outflow

Others cite an ever-growing trade dependency, vulnerability of money markets and historically high levels of household debt in a gloomier outlook.

“Korea’s financial pressures are skewed towards the domestic front. Credit levels in Korea are very high by historical standards. This reflects an increasing dependency of growth on credit. In turn, Korea is vulnerable to any interruption in the credit creation process,’’ said Ronald Man, an economist at the Hongkong and Shanghai Banking Corp. (HSBC).

“In contrast, Korea’s external financial pressures are historically low. This reflects good policy decisions,” Man said. “A strong build-up of FX reserves and new bilateral swap lines has reduced Korea’s short-term external vulnerability significantly since the 2008 global financial crisis.’’

So will 2012 prove to be new 2008, or worse, a belated sequel to the depressing late-1990s that left permanent scars on Korea’s society and spirit?

Where officials got it right 

Financial authorities have also installed several layers of safety measures to prevent speculative money flow and foreign capital flight, such as tightening limits on currency-forward positions and imposing levies on non-deposit foreign currency liabilities. Such efforts have been rewarded by falls in short-term debt.

“I know it’s hard to believe with all the depressing news headlines, but the Korean stock index has actually risen above 1 percent from the level it was at the end of last year, during a time when the major markets in Europe fell by at least 10 percent,’’ Financial Services Commission (FSC) Chairman Kim Seok-dong said in a recent meeting with local reporters and foreign correspondents.

“While some will criticize the openness of our money markets as vulnerability, I think it’s actually our biggest strength. Foreigners can spend here without being overly worried about whether they can pull out when times get tough and they need that money, and this is our biggest attraction as a market,” Kim said.

Ju Won, a senior economist from the Hyundai Research Institute (HRI), said the market will need to keep a close look on how the country manages its muscle in central bank reserves.

In a study published last year, Ju had claimed the country needs at least $385 billion.

This was based on the $132.8 billion Korea then needed to meet International Monetary Fund (IMF) recommendations that emerging economies hold three months’ worth of current payment cover, $149.7 billion in short-term debt at the time, and $100 billion that stood for 20 percent of foreign investment in Korean shares then.

While Ju has yet to make a similar calculation based on 2012 figures, he sees no real evidence of a foreign capital flight as of now.

“I have to say that financial authorities have done an admirable job over the past year in reducing short-term debt and fortifying banks,’’ he said.

Household debt is live grenade

But all this armor won’t matter if the economy’s body is decaying at the core and some critics believe this is precisely the case. The most considerable threat to Korea’s financial stability is its massive household debt mountain, which now essentially equals the size of an entire year’s gross domestic product (GDP).

Another area of concern is the country’s increasing trade dependency. Exports and imports combined accounted for 97 percent of Korea’s GDP last year, up from 92 percent in 2008.

There is also an alarming lack of versatility in Korea Inc., stemming from the growing disparity between export and non-export sectors. When excluding semiconductors, liquid crystal displays (LCDs), consumer electronics, mobile phones and automobiles, industrial output will be cut by nearly half, official figures show.

BOK puts the household debt mountain at 912.9 trillion won ($777 billion) based on data from savings institutions and other financial companies. When combing the borrowing from self-employed people, the total grows to over 1.1 quadrillion won, compared to the 1.2 quadrillion won the economy made last year.

The household debt to disposable income ratio speeds toward 160 percent and observers believe that this destructive level of personal indebtedness may have seriously compromised the economy’s ability to absorb shocks.

Household debt, when excluding the borrowing from self-employed people, was equivalent to just below 90 percent of GDP last year, compared to 78 percent in 2008, BOK data shows. Stagnant income, high unemployment and freefalling property prices, which is trapping more people in negative equity, suggests there will be no relief for the millions of households sinking under a sea of debt.

The World Economic Forum (WEF) draws a line for household debt-to-GDP ratio at 85 percent and insists that any country with a level above that is risking a financial crisis. The U.S. subprime mortgage mess erupted at a point when the money owed by Americans was equivalent to more than 95 percent of the country’s GDP, and all signs show that Korea is approaching this pressure point quickly.

A recent report by global ratings agency Moody’s cited the household debt problem as a risk.

“The real problem is the quality of debt and the squeeze on low-income households, who are hit dramatically harder by the downturn than high-income families,’’ said a CEO of a leading asset-management firm, who didn’t want to be named. <Korea Times/Kim Tong-hyung>

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