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.