S. Korea vulnerable despite IMF package<\/p>\n
By Kanta Watanabe<\/p>\n
TOKYO (Reuters): The IMF-led bail-out package for South Korea
\nis likely to provide only temporary relief, as it will take time
\nto restore confidence in the world's 11th largest economy,
\nanalysts and economists in Japan say.<\/p>\n
Korea's currency, the won, could remain under pressure as
\nausterity measures to be adopted by Seoul are likely to result in
\nmore failures of Korean conglomerates, known as chaebols, they
\nsay.<\/p>\n
\"With economic growth expected to be cut sharply next year,
\nmore collapses of chaebols are inevitable,\" said Yukiko Fukagawa,
\na senior economist at LTCB Research Institute.<\/p>\n
An aid package for South Korea put together by the
\nInternational Monetary Fund rose to $57 billion yesterday after
\nItaly said it would join and three other countries increased
\ntheir offers, Seoul's Finance Ministry said.<\/p>\n
Japan said on Wednesday it would provide $10 billion to South
\nKorea as part of the IMF package, surpassing its contribution to
\nsimilar packages for Thailand and Indonesia, to which it offered
\n$4.0 billion and $5.0 billion respectively.<\/p>\n
Conditions for receiving the aid have yet to be officially
\ndisclosed. But a senior South Korean Finance Ministry official
\nsaid on Tuesday that Seoul and the IMF had agreed to lower the
\ncountry's gross domestic product growth target for next year to
\nthree percent. The figure for 1997 is projected at 6.0 percent.<\/p>\n
South Korea will also be required to cap next year's inflation
\nrate below five percent against this year's target of 4.5 percent
\nand narrow its current account deficit to about $5 billion from a
\nprojected $13-$14 billion in 1997.<\/p>\n
\"The IMF package is a good step forward as it will allow South
\nKorea to avoid default in overseas debt repayment due before the
\nyear-end,\" said Takashi Nobehara, general manager of Center for
\nAsian Studies at the Japan Research Institute Ltd, a private
\nthink tank.<\/p>\n
Analysts say South Korea has about $60 billion to $70 billion
\nworth of short-term foreign debt, of which about $20 billion is
\nlikely due this month.<\/p>\n
\"But the big problem is far from being solved. That is, how is
\nthe government going to clean up the huge amount of non-
\nperforming loans?\" Nobehara said.<\/p>\n
Non-performing loans held by South Korea's commercial banks
\ntotaled 28.53 trillion won ($24.98 billion) at the end of
\nSeptember, Seoul's Finance Ministry said. Non-performing loans
\nare those on which interest has not been paid for six months.<\/p>\n
Analysts in Tokyo estimate loans held by the banks on which
\ninterest has not been paid for three months to be about 50.7
\ntrillion won ($44.4 billion).<\/p>\n
The figure for the non-performing loans would be about 32
\ntrillion won ($28 billion) if those held by merchant banks were
\nincluded, and could balloon in the coming months if more chaebols
\nfail, the analysts say.<\/p>\n
Japanese banks had the biggest exposure by a single country to
\nSouth Korea at the end of 1996. Loans by Japanese banks totaled
\n$24.3 billion, or about 35 percent of South Korea's total foreign
\nborrowings, according to the Bank for International Settlements.<\/p>\n
\"Some Japanese banks may be exposed to merchant banks,
\nincluding those that were ordered to suspend business recently,\"
\nsaid LTCB's Fukagawa.<\/p>\n
On Tuesday South Korea's Finance Ministry suspended business
\nactivities of nine merchant banks which were having difficulty
\noperating normally.<\/p>\n
But analysts said that the risk of Japanese banks being hit by
\ndefault was not very high, as the bulk of their loans were made
\nthrough South Korean commercial banks.<\/p>\n
\"As the government said it will guarantee loans made by
\ncommercial banks, the risk of those loans becoming totally
\nunrecoverable is not very high,\" said Japan Research Institute's
\nNobehara.<\/p>\n
Currency dealers and analysts expect the won to drift lower
\nafter a brief recovery.<\/p>\n
Takeshi Hanai, executive manager of the Industrial Bank of
\nJapan, said: \"Downward pressure on the Korean won may be
\nalleviated temporarily after the package. But big uncertainties
\nremain as to whether Seoul can effectively dissolve Korea's
\nailing chaebols.\"<\/p>\n
The won surged against the dollar yesterday on hopes that
\ndollar inflows from the IMF package would ease a dollar shortage
\namong Korean financial institutions. The won stood at 1,142.00 to
\nthe dollar at mid-morning yesterday, from Wednesday's close of
\n1,196.00.<\/p>\n
\"IMF loans can be used for foreign currency payments
\naccompanied by transactions of goods and services, but not for
\ncurrency market intervention. So they cannot completely offset
\ndollar-buying pressure in the market,\" said a dealer at the Asian
\ncurrency desk of a Japanese city bank.<\/p>\n
After a brief recovery, the won was more likely to edge lower
\nagain, the dealer said.<\/p>",
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