The IMF yesterday dismissed fears of a second financial crisis in South Korea, saying the country’s fundamentals are much stronger than in 1997.
Financial markets have been spooked by concerns of possible massive capital flight this month, when bonds worth US$6.71 billion held by foreigners mature.
The Korean won closed yesterday at 1,148.5 to the US dollar, down 14.5 won from Tuesday’s close and the lowest level since October 7, 2004.
The IMF said some parallels had been drawn to 1997 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 Korea today are much stronger than 10 years ago,” Meral Karasulu, the fund’s resident representative, said in a statement.
She said much of the short-term foreign debt was linked to currency hedging by Korean exporters and investors abroad.
“Furthermore, despite the recent increase, the outstanding external debt is still not unusually large when compared to Korea’s export earnings or international reserves, or when compared to other countries in the region,” Karasulu said.
Seoul officials also said there is no comparison to 1997, when the IMF made its biggest ever bailout of US$57 billion to help rescue the nation from state bankruptcy.
They say foreign exchange reserves of some US$243.2 billion are enough to meet liabilities.
“Such [crisis] talk is no more than wild rumors,” South Korean Prime Minister Han Seung-soo told reporters.
“No one in the government believes what we are experiencing now is similar to the International Monetary Fund crisis of 1997,” Han said.
Karasulu said that in the last decade Korea’s corporate sector had deleveraged significantly and was profitable, while banks had high levels of capital and low levels of non-performing assets.
“Financial supervision has been strengthened significantly. And Korea operates under a flexible exchange rate system,” she said.
Karasulu said the “modest” current account deficit and weakening won largely reflect “challenging global circumstances” and high oil prices.
“This is very different from 1997, when the driving factor behind the deterioration of the current account was a badly misaligned currency,” she said.
Stocks rebounded yesterday from an 18-month low as investors snapped up brokerage and construction shares despite the concerns over financial instability.
The KOSPI index rose 19.75 points, or 1.4 percent, to 1,426.89.
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