Indonesia in spotlight, but no cheers in S. Korea

Indonesia in spotlight, but no cheers in S. Korea

SEOUL (Reuters): Indonesia's mounting crisis may have drawn
the world spotlight away from troubled South Korea, but there is
little cause to celebrate in Seoul.

South Korea has been a major investor in Indonesia and further
problems there would simply feed an unresolved financial debacle
at home, analysts say.

Banking industry analysts in Seoul estimated on Monday that
the exposure to Indonesia of South Korea's debt-laden merchant
and commercial banks totaled at least $9 billion.

Its construction industry had an order backlog in the country
totaling several billion dollars, while South Korean car
manufacturers are involved in projects there in which they have
invested tens of millions of dollars.

Analysts and local media reports said talk about the
possibility of a debt moratorium and political upheaval in
Indonesia had raised concern about more financial troubles in
South Korea, just when it appeared to be turning the corner on
its own crisis.

Y.C. Mok, a banking industry analyst at ING Barings in Seoul,
said Indonesia's problems could seriously affect the ability of
some of South Korea's banks to meet Bank for International
Settlements (BIS) capital adequacy ratios, a requirement under
the country's $58.5 billion IMF-led bail-out and essential to
their ability to operate internationally.

He said that while South Korean banks had been trying to
reduce their exposure to Indonesia, it still totaled around $9
billion.

While the loans were still officially classified as
performing, Mok said it was difficult to determine how much of
the total was in fact being serviced, adding: "Indonesia has not
been so active in making repayments."

"All banks need to reach their BIS ratios soon," Mok said. If
a debt moratorium were declared, their ability to meet these
would be "crucially affected", he said.

"In a worst-case scenario (the Indonesian loans) could end up
being considered non-performing and if that happened it would
substantially damage the banks' efforts to meet their BIS ratio
requirements."

Park Joon, head of research at SGST Holdings in Seoul, said
the economic meltdown in Asia and a severe downturn at home had
already proved catastrophic for South Korea's construction
industry. Further problems in Indonesia would simply make matters
worse.

"South Korean construction firms have a backlog of three-four
billion U.S. dollars in Indonesia. If they can't receive a return
on their investment, it would greatly aggravate their financial
situations," Park said.

"Already 200 construction firms went bankrupt in 1997 and the
overseas market was the only hope for a revival. If this goes
wrong there's no way to compensate. I can't imagine what the
final result will be for the construction industry."

He said that if Indonesia were to declare a moratorium it
would affect construction investment throughout Southeast Asia
and have further knock-on effects in South Korea. The South
Korean industry relies on the region for more than for more than
70 percent of its overseas business.

"If a moratorium were declared many Korean construction
companies would go bankrupt -- even big ones, it's possible,"
Park said.

Analysts also expressed concern about the effect on South
Korea's already troubled Kia Motors. The firm is involved in
Indonesia's national car project, which is controlled by
President Soeharto's son Hutomo Mandala.

They said there was concern about the future of the
controversial project should the 76-year-old Soeharto heed
opposition calls and step down.

"There have been a lot of reports questioning the viability of
the project, but Kia keeps saying things are normal," said Kang
Hun-sok, a car industry analyst at ING Barings.

"The fall in the Indonesian economy has definitely not helped
the project. Even before sales were not going as well as
expected.

"And obviously, one of the reasons the alliance came about was
because of the political factor; if that were to change then
that's going to be another question mark."

A spokesman for Kia Motors played down the concerns and said
the Indonesian crisis would have a minimal effect on its overall
business. He said the venture in Indonesia had sold 25,412 cars
since August 1996, about half Kia's initial forecast for the
period.