Local Economy Exposed to External Risks
By Lee Hyo-sik
Staff Reporter
South Korea rapidly rebounded from the unprecedented worldwide economic downturn last year on the back of an aggressive government stimulus package and robust exports, and many project it will grow at an even faster pace in 2010 on the global economic recovery.
However, the outward-oriented economy has been struggling to cope with a host of unforeseen external negatives from the beginning of the year, witnessing its stock market plunge, the value of the Korean won weaken against the dollar and its balance of payments worsen.
At the center of the external risks engulfing Asia's fourth-largest economy include debt crises involving Dubai, and Greece and other southern European countries, and China's earlier-than-expected implementation of an exit strategy.
Analysts say that sovereign default risks half the world away will continue to rattle the domestic currency and financial markets for the time being, with foreign investors remaining reluctant to invest in local shares and other assets here.
China's move to absorb liquidity back from the financial sector is feared to dampen corporate investment, private spending and other economic activities as the world's fastest-growing economy demands fewer Korea-made products.
Some analysts have suggested the government strengthen its monitoring of the international financial sector. They advised companies to minimize foreign exchange risks and focus on core competence.
Dubai's debt problem has recently emerged as a major global downside risk as the UAE government and Britain, along with other creditors, are having a hard time narrowing differences over how Dubai should pay back its $60 billion in external liabilities.
Despite creditor protests, the UAE government is sticking to its plan to pay 60 percent of the $22 billion owed by subsidiaries of state-owned Dubai World without interest over the next seven years, raising speculation that Dubai's financial condition is in worse shape than previously thought.
Following the latest developments, Dubai shares fell 3.5 percent on Feb. 14, while its credit default swap (CDS) on five-year maturity state bonds skyrocketed to 6.61 percent, higher than 6.3 percent recorded on Nov. 27, 2009 when the Middle Eastern city state declared a six-month repayment moratorium on its debts.
Additionally, Greece's fiscal problem is deteriorating even after the European Union (EU) sought to bail it out last week. EU members have failed to reach a consensus on how they will help the southern European economy.
Germany and France advocate full-scale support, while Britain and Sweden, which are part of the EU but do not use the euro, remain unwilling to help the debt-stricken country.
Also, Germany, the largest European economy, is demanding that the Greek government cut the wages of public-sector employees, raise taxes and implement other stringent fiscal-tightening measures in return for financial aid. But Greece is widely expected to reject these pre-conditions, weighing heavily on European financial markets.
Greece and other southern European countries have outspent their revenue by a large margin to boost domestic demand in the aftermath of the global economic crisis. But they are now saddled with huge debts and face difficulties in securing necessary funds amid the continued jittery international financial market.
"The debt problems engulfing Greece and Dubai have been around for months and unlike corporate risks, sovereign uncertainties usually take longer to be resolved. Not only these two countries, but also the rest of the world will experience a bumpy ride for the time being," Samsung Economic Research Institute (SERI) chief economist Kwon Soon-woo said.
He said the Korean government should closely monitor changes in the global financial market, including the movement of cross-border capital, and ease volatilities on the domestic foreign exchange market.
But a larger external risk for the Korean economy is China's steps to absorb liquidity, Kwon said.
Last Friday, the People's Bank of China, the country's central bank, raised the reserve ratio for banks by 0.5 percentage points for second time in a bid to discourage them from extending credit, hitting the U.S. and other stock markets around the world hard. In January, Chinese banks were required to boost their loan reserves by the same amount.
"China is Korea's largest trading partner and export destination. If China slows its economy down, it will certainly negatively affect the Korean economy. But the problem is there is nothing we can do about it and we just have to adjust ourselves to the changing external environment," the economist said.
Kwon then said domestic companies should make more effort to streamline their business portfolios and place top priority on core businesses. "Individuals here should brace for rising interest rates, and refrain from borrowing money to invest in real estate, stocks and other risky assets."