Second debt crisis looming for South Korea

Second debt crisis looming for South Korea

SEOUL (AFP): South Korea can breathe easier as its foreign exchange reserves grow, but it could face a second crisis in the second quarter because of huge corporate debts, analysts said.

Even after the rescheduling of US$24 billion short-term debt owed by South Korean banks, there remains an estimated $58.8 billion of foreign debt falling due this year, according to London brokers SBC Warburg Dillon Read.

Of the $58.8 billion, an estimated 90 percent is corporate debt, SBC Warburg Dillon Read said in a recent report, a copy of which was obtained by AFP.

"Pressure points are likely to arise in the second quarter, when more than $20 billion falls due," it said.

With domestic debt running at between 600 and 800 trillion won ($428.5 billion to $571.4 billion and with interest rates likely to remain at or above 18.2 percent throughout the year, the risk of corporate default is "immense," it said.

"There is huge risk of corporate default on foreign and/or domestic debt. The attendant risk of a systemic collapse in the under-capitalized banking sector is no less large."

"The cost to the government of guaranteeing corporate debt is high, as Korea is not currently likely to be re-awarded investment grade credit ratings," it said.

But the flipside is markedly higher foreign exchange reserves, although export values are low, analysts agreed.

"As far as the foreign exchange reserves are concerned, you can safely say the worst is over although we have to continue keeping an eye on them," Oh Suk-tae of Citibank told AFP.

"Now, more fundamental and long-term problems such as financial sector reform and business restructuring, which have been overshadowed by the urgency of the foreign exchange crisis, have come to the forefront," he said.

The "usable" foreign exchange reserves, which fell to a low of four billion dollars in December, stood at some $24 billion Saturday, about the same levels South Korea stood before the crisis started in November.

The increase in foreign exchange reserves was attributed to inflows of rescue funds, the successful rollover of short-term foreign debts and the growing trade surplus caused by sluggish domestic demand for imports.

South Korea has raised its 1998 trade surplus target to $25 billion, more than double its earlier goal, with exports projected at $147.5 billion and imports at $122.5 billion.

Emboldened by a series of encouraging signs, South Korea launched a sales promotion campaign last week to sell its first dollar-denominated bonds worth more than three billion dollars.

The won, which fell as low as 2,000 won per dollar at the height of the foreign exchange crisis, sustained its recent recovery Friday, closing at 1,377 won per dollar after opening at 1,394 won.

But analysts warned that South Korea would be in for a real test in the coming years.

"Many insolvent financial institutions, including leasing companies, trust funds and insurance firms, are waiting to be operated on," another foreign exchange dealer said.

South Korea has closed 14 insolvent merchant banks and plans to auction off government stakes in the country's two weakest commercial banks -- Korea First Bank and Seoulbank -- in July or August, a few months ahead of schedule.