S. Korea vulnerable despite IMF package

S. Korea vulnerable despite IMF package

By Kanta Watanabe

TOKYO (Reuters): The IMF-led bail-out package for South Korea is likely to provide only temporary relief, as it will take time to restore confidence in the world's 11th largest economy, analysts and economists in Japan say.

Korea's currency, the won, could remain under pressure as austerity measures to be adopted by Seoul are likely to result in more failures of Korean conglomerates, known as chaebols, they say.

"With economic growth expected to be cut sharply next year, more collapses of chaebols are inevitable," said Yukiko Fukagawa, a senior economist at LTCB Research Institute.

An aid package for South Korea put together by the International Monetary Fund rose to $57 billion yesterday after Italy said it would join and three other countries increased their offers, Seoul's Finance Ministry said.

Japan said on Wednesday it would provide $10 billion to South Korea as part of the IMF package, surpassing its contribution to similar packages for Thailand and Indonesia, to which it offered $4.0 billion and $5.0 billion respectively.

Conditions for receiving the aid have yet to be officially disclosed. But a senior South Korean Finance Ministry official said on Tuesday that Seoul and the IMF had agreed to lower the country's gross domestic product growth target for next year to three percent. The figure for 1997 is projected at 6.0 percent.

South Korea will also be required to cap next year's inflation rate below five percent against this year's target of 4.5 percent and narrow its current account deficit to about $5 billion from a projected $13-$14 billion in 1997.

"The IMF package is a good step forward as it will allow South Korea to avoid default in overseas debt repayment due before the year-end," said Takashi Nobehara, general manager of Center for Asian Studies at the Japan Research Institute Ltd, a private think tank.

Analysts say South Korea has about $60 billion to $70 billion worth of short-term foreign debt, of which about $20 billion is likely due this month.

"But the big problem is far from being solved. That is, how is the government going to clean up the huge amount of non- performing loans?" Nobehara said.

Non-performing loans held by South Korea's commercial banks totaled 28.53 trillion won ($24.98 billion) at the end of September, Seoul's Finance Ministry said. Non-performing loans are those on which interest has not been paid for six months.

Analysts in Tokyo estimate loans held by the banks on which interest has not been paid for three months to be about 50.7 trillion won ($44.4 billion).

The figure for the non-performing loans would be about 32 trillion won ($28 billion) if those held by merchant banks were included, and could balloon in the coming months if more chaebols fail, the analysts say.

Japanese banks had the biggest exposure by a single country to South Korea at the end of 1996. Loans by Japanese banks totaled $24.3 billion, or about 35 percent of South Korea's total foreign borrowings, according to the Bank for International Settlements.

"Some Japanese banks may be exposed to merchant banks, including those that were ordered to suspend business recently," said LTCB's Fukagawa.

On Tuesday South Korea's Finance Ministry suspended business activities of nine merchant banks which were having difficulty operating normally.

But analysts said that the risk of Japanese banks being hit by default was not very high, as the bulk of their loans were made through South Korean commercial banks.

"As the government said it will guarantee loans made by commercial banks, the risk of those loans becoming totally unrecoverable is not very high," said Japan Research Institute's Nobehara.

Currency dealers and analysts expect the won to drift lower after a brief recovery.

Takeshi Hanai, executive manager of the Industrial Bank of Japan, said: "Downward pressure on the Korean won may be alleviated temporarily after the package. But big uncertainties remain as to whether Seoul can effectively dissolve Korea's ailing chaebols."

The won surged against the dollar yesterday on hopes that dollar inflows from the IMF package would ease a dollar shortage among Korean financial institutions. The won stood at 1,142.00 to the dollar at mid-morning yesterday, from Wednesday's close of 1,196.00.

"IMF loans can be used for foreign currency payments accompanied by transactions of goods and services, but not for currency market intervention. So they cannot completely offset dollar-buying pressure in the market," said a dealer at the Asian currency desk of a Japanese city bank.

After a brief recovery, the won was more likely to edge lower again, the dealer said.