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As the flames of the U.S. financial crisis raged through Europe and spread to emerging markets, foreign investors¡¯ views of the Korean economy have grown more pessimistic.
The credit default swap (CDS) premium on 5-year foreign exchange stabilization bonds issued by Korea has jumped almost four-fold from 1.8 percent at the end of September to 6.84 percent last Friday. The CDS premium is an index that indicates the chances of default by a particular country. The CDS premium on Korea is higher than countries whose sovereign ratings are lower, such as the Czech Republic (2.25 percent), Malaysia (4.95 percent) and Chile (3.15 percent).
In a column he wrote in the New York Times, Nobel prize-winning economist Paul Krugman wrote, ¡°The really shocking thing, however, is the way the crisis is spreading to emerging markets ? countries like Russia, Korea and Brazil.¡± The Times of London also recently wrote, ¡°There is the view that South Korea is, in effect, the Bear Stearns of Asian economies.¡± Bear Stearns is an investment bank that merged with JP Morgan Chase after being badly damaged by the sub-prime mortgage crisis. Every time problems among emerging markets are mentioned by foreign news media, Korea is always mentioned.
Misunderstanding and a lack of information contribute to such views. A representative example is the US$176 billion in short-term loans that mature in less than a year. Foreign media cite this as the main example of how Korean banks indiscriminately borrowed from overseas, oblivious to lessons learned from the Asian financial crisis, raising the danger of the Asian country¡¯s foreign currency reserves becoming depleted.
This is totally wrong. Included in Korea¡¯s short-term debt are loans borrowed by shipbuilders that are automatically resolved when they receive payment for vessels, and money that Korean branches of foreign banks borrowed from their head offices to invest in bonds here. If these loans are considered, then the total amount of short-term debt owed by Korean banks is around $80 billion.
Moreover, most of the short-term debt incurred by domestic banks are related to trade financing to support exporters and importers. Foreign debt did not flow into the real-estate market as in Iceland and Hungary. Generally, countries that trade actively have a large amount of short-term debt. Japan¡¯s foreign currency reserve amounts to $996.7 billion, while it holds $1.3 trillion in short-term debt. Germany, Singapore and Hong Kong also have more short-term debt than foreign currency reserves. At $240 billion, Korea¡¯s foreign currency reserve is higher than its short-term debt.
Views of Korea¡¯s $12.6 billion current account deficit accumulated until the end of August have also been exaggerated. Most emerging markets that recently turned to the International Monetary Fund for emergency bailout loans posted recent current account deficits amounting to more than 5 percent of their GDP. But over the 10 years since the 1997-98 Asian financial crisis, Korea has steadily built up its current account surplus. On top of this, crude oil and raw materials costs, the main factors behind Korea¡¯s current account deficit, have recently dropped, leading to a current account surplus starting this month.
The debt-to-equity ratio of Korean businesses is around 96 percent, which is lower than that of companies in advanced countries. Korean businesses are world leaders in semiconductors, mobile phones, steel and shipbuilding. The strengths of Korea¡¯s economy are globally recognized products, brands and major business conglomerates hard to find in other emerging markets. The constitution and strength of our economy has changed drastically after weathering the financial crisis.
We must think about the source of such panic-stricken rumors about the Korean economy, even though the numbers paint a different picture. Perhaps the Korean government is not capable of working effectively and properly.
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