Mon, Sep 08, 2008 page11

• ANALYSIS: Confused policies fueling Korea crisis fears: analysts

  DON’T PANIC Despite economic jitters, South Korean government debt is less than 40 percent of GDP and its foreign exchange reserves are the world’s sixth largest.

  • AFP
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  South Korea’s government is striving to reassure investors that fears of a second financial crisis are groundless, but analysts say its own confused policies are partly to blame for the uncertainty.

  Financial markets have been roiled by talk of a “September crisis” when treasury bonds held by foreigners and worth US$6.71 billion mature this week.

  Foreign investors have for months been bailing out of the stock market. Fears of mass capital flight have helped fuel the won’s slide against the dollar.

  But analysts say there is no prospect of a re-run of 1997, when the IMF rescued the nation from bankruptcy with a US$57 billion bailout.

  The IMF said some parallels had been drawn given the rising external debt, a weakening currency and the current account moving into deficit.

  “It is important to emphasize that these similarities are largely superficial, and the fundamentals of [South] Korea today are much stronger than 10 years ago,” it said in a statement.

  currency outflow

  The fundamental reason for the current problem is a sudden outflow of foreign currency, Samsung Economic Research Institute chief economist Kwon Soon-woo said.

  “But the government is partly responsible for playing a role in rumors of a crisis,” he said. “Our markets have been confused by mixed signals from the government.”

  “Verbal and other types of intervention in the forex market have caused confusion. I believe the government has largely failed to win trust from the market,” Kwon said.

  South Korean President Lee Myung-bak, styling himself the “economy president,” came to power in February on a pledge to boost growth.

  Finance Minister Kang Man-soo initially called for a weaker won to boost exports.

  Then came a surge a surge in world oil prices which — along with the slumping won — pushed inflation close to a 10-year high. Authorities bought billions of dollars to try to prop up the won.

  “Policy has been fairly disordered,” said Daniel Melser, senior economist at Moody’s Economy.com.

  “The finance minister was pushing for a weaker won, quite counter to the central bank’s fight against inflation — this was a fairly fundamental difficulty,” he said.

  bad timing

  Melser said that Lee’s drive for economic growth had been a victim of bad timing but said the president failed to develop a cohesive strategy.

  “It was not clear at the start what his priority was, fighting inflation or boosting growth, and he failed on both fronts,” Mesler said.

  Public comments by Lee and Kang have not always boosted confidence.

  In late July Kang said the economy was facing problems as severe as in 1997 even though exports remained strong. It was his second dire warning of the month.

  The Korea Times noted last week that Lee’s chief of staff had cautioned against too much crisis talk.

  “It was actually the president, however, who mentioned the word ‘crisis’ more than 10 times in an address a few months ago, probably to calm down the escalating candlelight protests,” the newspaper said in an editorial.

  “Now, the cry-wolf tactic is coming back to Lee like a boomerang,” the paper said.

  The Korea Herald also said the government was largely responsible for the markets’ panicky reaction to rumors.

  “It warned of an impending economic crisis, apparently in an attempt to restore political stability [during the protests against US beef imports],” the paper said in an editorial.

  When rumors took hold, the Herald said, it was slow to calm fears with facts.

  Those facts are still reasonably reassuring. Even if growth falls to around 3 percent late this year, as some predict, that is still far healthier than the US and most of Europe.

  Government debt is less than 40 percent of GDP and foreign exchange reserves of US$243 billion are the world’s sixth largest.

  consolation

  Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, had words of consolation when he visited in June.

  “Koreans may feel a little depressed that they’re growing less than their full potential, but I would compare it to the growth of [other] OECD countries, which is below 2 percent on average,” he said.

  Gurria noted that South Korea is actually raising the overall average.
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