Another Economic Crisis Looming Large with Burgeoning Debt in Korea

Another Economic Crisis Looming Large with Burgeoning Debt in Korea. November. 24, 2002 22:55. by Jei-Gyoon Park phark@donga.com.

According to the Nov. 22nd report of The Financial Times, the future forecast for the Korean economy is gloomy. Some analysts even warn that Korea might face another economic crisis in the near future. Korea has been considered one of the star pupils of the IMF. The Financial Times pointed out that the individual loans have been increasing too rapidly in such a short time. In the process, banks may sustain a mountain of bad debts. In addition, if the export of Korea does not rebound next year as expected, the Korean economy will get slower, and will watch many people getting unemployed and more individuals filing bankruptcy. The following are the excepts of the report.

"Korea has paid back its loads from the IMF, commanding the status of one of the most promising economies in Asia. This year alone, it is expected to achieve a 6% development. Korea`s recovery is in sharp contrast to the fall of other `tiger economies` such as Indonesia and Thailand."

"What lied behind the recovery of Korea from the economic crisis in 1997 was the redistribution of the capital from the corporations to the individuals. Korea, which once boasted of the highest saving rate, began to watch, all of sudden, its citizens to spend the money they borrowed from the banks. The increased consumption has powered the economic development of Korea ever since 1999.

Park Young-chul, professor at Korea University, said that the total debts of the households occupy more than 40% of the total loans the banks have made, and exceed 70% of the GDP. Park predicted, `If 10% of the individual loans became the junk bonds, the Korean banks would face a big difficulty.` With the domestic consumption slowing down, Korea depends its economic development upon exportation. The future of the world market, however, does not look sanguine.

On the other hand, most experts consider the `second economic crisis` scenario exaggerated. Hyun Chong-tack, Chief Economy Aide to President, stresses that the government is in a position to make use of the monetary as well as the financial policies to boost the economy. He says that Korea has built up a strong bumper mechanism against a potential shock, and has maintained the interest at 4.25%. Chang Ha-sang, professor at Korea University, said, `In the past, there was no early warning system. Now, we are aware of the possible crisis and making efforts to prevent it.`

Korea may not face the repetition of the economic crisis it experienced in 1997. The president-elect, who will be determined next month, is expected to perform various tasks to return the economy to a sound state. Approximately one third of Korean companies have not made enough profits to make payments for the interest. The heated competition among some credit card companies and banks to lend loans demonstrates that the domestic "risk standards" have to go a long way to meet the international ones."