Fingernail Biting in Seoul . . .

This currency devaluation just doesn’t make any sense to me. Korea’s economy was in good relative shape before the panic.

From english.chosun.com

Korea Sinking? Not Just Yet

The Financial Times ran a special report on Tuesday entitled “That Sinking Feeling” about Korea’s economic crisis. “Like the U.S., its consumers and companies have taken on too much debt,” it said. “Korea’s problems look scarily familiar.” The FT said Korean banks, like their counterparts in the U.S. and U.K., are stuck “between a rock and a hard place” as global credit markets remain clammed up. “Korea has some $175 billion in external short-term debt that has to be rolled over by the end of next June” that keeps “Korean policymakers sweating at night.” The FT said the situation was becoming more difficult since the public does not trust the ability of the government. Those who read the article probably felt as if another financial crisis was looming over Korea.

Parts of the FT article are accurate and worthy of consideration by Korean government officials. But there are also areas that are either exaggerated or untrue and need to be corrected before a global audience. It is a good point that Korea ranks sixth in the world in terms of the size of its foreign currency reserves but could end up seeing that large reserve depleted if the government repeats expensive moves to stem the fall of the won, as it did recently by unloading $40 billion into the forex market.

But there are many areas in the article that are not balanced, such as exaggerating the ratio of deposits against outstanding loans at Korean banks as being 124 percent, when it is actually 103 percent, while excluding facts such as Korea’s corporate debt-to-equity ratio has fallen to 93 percent from 423 percent in 1997. Shipbuilders sell dollars to banks in advance before they get them from their customers. These deals are written up as short-term debt in the books, but they do not carry risks in terms of serviceability. Yet the FT ignores the fact that these deals account for between $60 to $70 billion out of Korea’s short-term liabilities.

As its conclusion, the article says most experts are confident that Korea’s economic fundamentals are sound enough to avoid an Icelandic collapse, but presents hardly any evidence to support that, even though it diligently points out or exaggerates each factor that is raising fears. Other than a special report in Iceland, Korea is the only other country the FT focused on singly in its analysis page.

On Oct. 9, the Wall Street Journal ran an article entitled “Is South Korea Asia’s Iceland?” The WSJ spent more than half of that article saying the risks were small in Korea, but reported that it is no. 1 in the region in terms of its current account deficit and the weakened state of its financial institutions. The financial wire service Dow Jones reported on Oct. 8 that credit ratings agency Fitch said Korea’s banking sector was showing signs of default. But the report by Fitch was merely pointing out, theoretically, that if the liquidity crunch were to spread to defaults, then Korea’s sovereign rating could be affected. The International Herald Tribune on Oct. 8 reported Korean banks faced a crisis after borrowing dollars and extending loans in won. But Korea has completely separate systems of raising dollar and won funds and operates them separately as well.

The reason why such reports continue is because we have been lazy in our efforts to convey the facts about our economy to the international media accurately, even though we were quick to express our displeasure with certain types of coverage. There are no regular briefings for the foreign press, and we rarely offer background briefings even though our economy is the 13th largest in the world and, more importantly, fully exposed to international economic conditions. Inaccurate reports happen because we do not provide accurate information. These reports are then being spread across the world as other media cite them. The day after the FT article was published, Hong Kong dailies carried it word for word, so rumors of an economic crisis in Korea were reproduced and retransmitted. The reason behind the global financial crisis is a lack of confidence. The government must no longer sit idle while confidence in our economy is being eroded.

You probably aren’t aware of yesterday’s article in the Korean language section of the Chosun Ilbo. They absolutely shredded the Financial Times and spit it out. They mentioned Britain’s 10 Trillion Dollar foreign debt to Korea’s 400 billion dollar debt. The astronomical per capita debt to GNP ratio of Britain’s economy compared to South Korea’s, Britain’s 20 year account/trade deficits versus Korea’s deficit this year, Britain’s measly 70 billion dollar reserve versus Korea’s 240 billion. And the Chosun finishes up with a “you should be worried about yourself, instead of pointing fingers at others”.

In another article in the Chosun, they mention this article from International Herald Tribune October 14:

http://www.iht.com/articles/2008/10/14/opinion/edbowring.php

Moody’s and S&P decided to hold Korea’s sovereign credit rating.

” S&P reaffirms sovereign credit ratings on S. Korea

Standard & Poor’s (S&P) Ratings Services Friday reaffirmed its sovereign credit ratings on South Korea, citing the nation’s sound fiscal and external positions, Yonhap News Agency reported.

The global rating appraiser said in an e-mail statement that it has decided to keep its foreign- and local-currency long-term sovereign credit ratings on South Korea at “A” and “A+,” respectively. The outlook on the long-term ratings is stable, it added.

“The sovereign credit ratings on Korea are supported by its dynamic economy, sound fiscal position, and sound external position,” S&P said in the statement.

Still, the appraiser underscored difficulties confronting South Korea, saying that the Korean financial system has faced “intensifying pressures.”

The move comes on the heels of a statement by Moody’s Investors Service saying it has maintained its A2 “stable” outlook for South Korea’s government-issued bonds based on the country’s economic resilience.

S&P said that South Korean banks are facing “increasing difficulty” in refinancing foreign currency requirements with costs growing for wholesale funding and tightening borrowing conditions for foreign currency.

Such tough conditions will likely be prolonged, it noted, adding that Korea’s financial sector will be negatively affected by the ongoing economic turmoil, which many fear will send the global economy into a recession.

“Nevertheless, we anticipate that decisive policy measures will be put in place to ease domestic and foreign liquidity conditions,” said the appraiser. “We expect the Korean government to have the financial capacity to implement measures of sufficient strength to limit deterioration in the banks’ financial performance.”

2008.10.17″