By Kim Tae-gyu
Staff Reporter
With a $30 billion currency swap plan with U.S. Federal Reserve last week, the markets are showing signs of a return to calm. But to completely regain a normalcy, Korea needs to defuse three other ``time bombs.''
Among the three, the top priority is construction companies and banks, analysts said Sunday. The other two risks are household debts related with declining real estate prices and the slowdown of the exports, which account for a big chunk of Korea's gross domestic product (GDP).
``Our economy has several weak links that can be devastated by the slumping world economy. Currently, the weakest link appears to be project financing,'' said Lee Geun-tae, a senior researcher at LG Economic Research Institute.
``The terrifying part of project financing is its chain reaction. To be sure, some construction companies will collapse, weighing heavily on the whole banking system. I am not sure how bad things will evolve, though,'' Lee said.
A project-financing scheme refers to a way to secure funds for a particular project such as railway, nuclear power station, toll road or construction of large infrastructure.
In Korea, the new financing format was largely used to build big apartment complexes ― banks provided money for building the apartments through non-recourse loans secured by cash flow from the project itself.
``The government announced the total amount linked to the project financing plan would be somewhere between 70 to 80 trillion won,'' said Jang In-hwan, president of KTB Asset Management.
``However, I think the real amount would be about 100 trillion won with a half of it obliged to banks. This means that banks have potential additional non-performing loans of 50 trillion won,'' he said.
This would be a burden for Korean banks that have already suffered from liquidity shortfalls in both dollars and won.
Over the January-October period this year, up to 251 construction companies went bankrupt, up 47.6 percent from the same period of last year.
Household obligations from banks are another headache with the amount reaching 383.4 trillion won as of the end of September, which is bigger than the government's annual budget of around 250 trillion won.
``At the moment, household debts are tolerable. But the thing is what if the home prices keep heading south? If real estate prices continue to go down, owners will have no alternative but to sell them off'' said Kim Kyung-mo, an economist at Mirae Asset.
``Then, many households would default if the government does not come up with countermeasures. The ripple effect will be more than great. It will be catastrophic and I don't want to imagine that,'' Kim said.
Finally but not least in importance, Korea is shipping less products than ever.
According to the Samsung Economic Research Institute, Korea’s exports growth rate is like to halve from 27.7 percent over the third quarter of this year to 14.2 percent over the final three months.
The figure is expected to deteriorate further to 8.3 percent next year according to the private think-tank. This is a big hitch for the export-oriented Korea where two thirds of GDP is accounted for by trade.
``Exports will be affected by the global financial woes in three to six months. We need to prepare for the worst-case scenario that we will suffer from a declining economy for the next two years,'' said Yoo Jang-hee, professor emeritus at Ewha Womans University.