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.