Asia Times: South Korean economy faces a host of potential problems



	January 13, 2000	atimes.com

Asian Crisis

South Korean economy faces a host of potential problems

SEOUL - The South Korean economy this year is projected to perform well given the bright outlook shown by leading indicators, but it could face problems from many variables following the financial crisis in late 1997, the Samsung Economic Research Institute says.

A hard landing of the US economy, an unstable financial market, widening income disparity, labor unrest, delayed reform progress and inflation could burst the nation's economic bubble, it warned on Wednesday.

Optimistic signs for the economy include the development of the information and communication industry, stable growth of the stock market and the conclusion of corporate restructuring.

Real economic growth will be 6.5 percent this year with the current-account surplus amounting to $10.4 billion. Inflow of foreign stock funds amounted to $41.4 billion last year and outflow $36.2 billion for a net inflow of $5.19 billion. Foreign exchange reserves came to $74 billion at the end of last year.

The institute says the US stock market has been moving up and down entering 2000, showing that the US economy could slow down rapidly depending on how fast the decline in the bourse comes. The fall of the US stock market would affect the Korean Stock Exchange which, in turn, would curtail the growth of the economy. The Nasdaq index dropped 229.5 points on a rumored rise of US interest rates on January 4 and climbed back up 155.5 points three days later.

The financial market will remain unstable because of the lingering issue of Daewoo bonds to be resolved in February, and the fate of Daewoo Group affiliates on debt workouts is still uncertain. The foreign exchange market will be vulnerable to movements of foreign stock funds in and out of the country. Instability of the financial market could trigger a rise in interest rates, with pressure on corporate funding, the institute said.

The restructuring program may suffer, with banks in need of new funds to shore up their operations hit by the Daewoo debacle. The injection of public funds is needed further for restructuring of investment and trust firms and the redemption of Daewoo bonds.

In addition, more public funds are needed if the Korea Asset Management Corp and the Korea Deposit Insurance Corp cannot secure funds through the sale of bad assets.

Industry will go through a divisive phase, with digitalization on one side and traditional industry on the other, following the culmination of the financial crisis and restructuring. The information and communication industries have made rapid progress in particular, but this development could endanger the economic fundamentals, the institute says. Income disparity and labor strife will worsen, with the income gap deepening to a point where 20 percent of the population are the haves and 80 percent the have-nots.

The traditional employment system has given way to an increase in the number of per diem employees with more companies shifting to the annual salary system. Labor-management confrontation, dormant since the financial crisis, could be aggravated with economic recovery.

The government's debts have risen since the financial crisis, with total national debts, including guarantees, amounting to 194.8 trillion won, about 40.1 percent of gross domestic product. A rise in welfare spending and interest on national debts will bring pressure on public finances. There are also signs that inflation could rise higher this year, with facility investment hitting 40 percent and consumer spending continuing to climb. Wage increases and higher prices of international raw materials could fuel inflation.

The institute says an increasing amount of funds is being channeled into the stock and venture markets for high profits in a dangerous money game, creating worries of a bubble burst at any time. Stock market capitalization reached 456 trillion won ($401 billion) at the end of last year with the Kosdaq market expanding 1,228 percent from the end of the previous year.

Critics, however, worry that the US economy and other export markets have too large a bearing on the Korean stock market, including the Kosdaq. The institute recommends the maintenance of low interest rates based on a new macro-economic structure focusing on preventing a wider swing of the foreign exchange market and closing the income gap.

(Asia Pulse/Yonhap)