 Chairman of McKinsey and Company Asia Pacific |
By Kim Jae-kyoung
Staff Reporter
The recent developments on the local financial market remind Koreans of the 1997-1998 financial crisis that swept through many Asian countries, with the local currency collapsing and the country's current account shortfall widening.
Growing fears of a massive foreign capital outflow are exacerbating investor sentiment, driving the currency market into chaos and thus fanning worries that the world's 13th largest economy may undergo another financial crisis.
A noted global consultant ruled out such a possibility, stressing that Korea will not face a crisis similar to the one it experienced in 1997-1998 as the situation today is totally different.
In an exclusive interview with The Korea Times, McKinsey and Company Asia Pacific Chairman Dominic Barton said that another crisis is unlikely as corporate debts remain manageable and foreign reserves are ample.
``We are in difficult situation but I don't think that we are in a big trouble yet and going toward a financial crisis. Now is very different from the 1997-1998 financial crisis as we have much less corporate debt and much more foreign reserves,'' he said.
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``But we have to be very careful in handling this turmoil because we can fall into the trap of a self-fulfilling crisis,'' he said.
A self-fulfilling crisis occurs when an economy is subject to an exodus of foreign capital as a result of investors' loss of confidence in the market where fears feed on other fears. Even if the economy is solvent, the rush of investors to pull their money out of the country at once will cause illiquidity in the economy.
``The biggest problem in Korea is not the credit crisis. I don't think Korean banks are vulnerable like European banks with high loan-to-deposit ratios,'' Barton said.
``I think the biggest issue around is that the credit crisis is turning into recession. The issue is how we can figure out ways to keep our economy from slipping into recession,'' he added. ``We need a comprehensive program on how we reduce current account deficit, how we reshape our exports, and how we boost domestic demand.''
Asked where the global credit crisis is heading, the veteran Canadian consultant said that the crisis stemming from the U.S. subprime mortgage meltdown is about halfway over, but tougher challenges lie ahead.
``I find that the crisis lies more in the middle rather than at the end. It is a very difficult thing to understand because no one knows total exposure. The problem is that there is so much fear that the crisis will continue to get worse,'' Barton said.
The veteran consultant, who is the chairman of the International Advisory Committee to the President of Korea on National Future and Vision, said that the fallout from Wall Street has just crept into the global economy.
``I think what's going to happen is a liquidity crisis shifting to a credit crisis and to recession. Once we get into recession, we will see a recession in the U.S. and then a recession in Europe,'' he said.
``It means that even today's good mortgages and small- and medium-size enterprises will go bad. Even sound financial institutions during a recession will have challenge in their credit portfolios,'' he added.
Barton, who led McKinsey's office in Korea from 2000 to 2004, said that countries such as China, India and Australia are relatively fine with the fallout from the ongoing crisis, but Korea will be heavily affected because of its export orientation.
Citing one of the biggest issues, he said, ``The trade imbalance may put pressure on the current account, which will strain the exchange rate,'' he said.
He pointed out that a hike in exchange rate may lead to rising interest rates, which will cause a real problem, saying, ``Banks will have a trouble if interest rates jack up.''
He emphasized that Korea should do something to stimulate the economy by propping up domestic demand, recommending tax cuts and infrastructure project.
``Tax is one thing that we have to look at because tax cuts can encourage people to spend more. Another thing are infrastructure projects, which will create jobs,'' Barton said.
``The third thing is we have to be much more conservative in our energy use. We have to be much more efficient. We can find a way to reduce energy expenditure,'' he said.
Barton is a member of the Brookings Institution Foreign Policy Leadership Committee and a Rhodes Scholar with an MPhil in economics from Oxford University.
kjk@koreatimes.co.kr
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