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.