By Kim Jae-kyoung
Staff Reporter
While the U.S.-led financial crisis is not over yet, a crisis stemming from Central and Eastern Europe is around the corner, putting further constraints on the faltering Korean economy.
In its latest report, global investment bank Goldman Sachs said that concern over a banking crisis across the Eastern European region could add to pressure on the falling local currency through financial linkage.
It warned that a hard landing in the region will ripple through the economy through three transmission channels ― the Korean won, exports and direct investment.
``Given that European banks are heavily exposed to the Eastern European region, turmoil in the region would make a rollover of Korean external debts more difficult and more expensive than they otherwise would have been,'' Gloman Sachs Korea economist Kwon Goo-hoon wrote in the report. Out of the nation's total foreign debts, $151 billion are short-term as of the end of 2008.
Given that European countries account for 51 percent of global ship orders as of 2008, further stress on European banks could lead to more cancellations of ship orders and delays in payment, adding to further pressure on the won, it pointed out. The local currency has fallen some 16 percent against the dollar so far this year.
``Second, the global recession has already reduced exports to this region sharply, by about 40 percent year-on-year between November and January. A further 20 percent decline in real exports to the region would reduce Korea's total real exports further by 1.3 percentage points from a current projection of minus 11 percent for 2009,'' Kwon said.
He pointed out that Korea's exports' exposure to Eastern Europe is 6.5 percent of total exports, or $27 billion, concentrated in autos and electronics.
``Thirdly, we believe Korean companies will incur losses in their investments initially through currency depreciation, although they are likely to recoup the losses eventually through competitiveness gains from cheap currencies,'' he added.
The investment bank explained that Korean companies' direct investment exposures to the region represents no more than 10 percent of company investments and that they are concentrated in the automobile, retail and banking sectors.
``Overall, we see an upside risk from the possible turmoil in Eastern Europe to our won-dollar forecasts, currently set at 1,450, 1,400 and 1,300 on three, six and 12 month horizons,'' Kwon said.