[VIEWPOINT] Restructure Now To Enliven Stocks

Let us take a look at the current situation of the Korean stock market, the world's worst performer last year. Early in 2001, it posted strong gains. The rebound was due mainly to the market consensus that prices could go no lower. The Korea Composite Stock Price Index has quickly bounced back, and most people are staying on the sidelines, trying to figure out when it will start picking up again and, hopefully for sounder reasons than just "because it is oversold." Amid the slowing global economy, concerns are focused on when the local economy will start recovering. Some favorable signs are coming from the financial market, but the key is corporate restructuring, which is lagging.

Early last week, the government came out with the view that the domestic economy would start to recover in the second quarter of this year instead of the second half, which economists had been forecasting. Most economists are sticking to their second-half predictions. The biggest support for the government's view was the improving BSI (Business Survey Index), which rose to 83 from 63.7 in January, but the fact that it is still below 100 means business sentiment remains negative. Some observers are over- excited about recent interest rate activity, namely falling government bond rates and livelier corporate bond issues. They would surely be positive signs for the stock market in a normal situation. But the recent boost in demand for creditable government securities is merely a reflection of investors' aversion to risky corporate issues, which are largely attributed to government support.

Foreign investors' anticipation of a deep rate cut by the Bank of Korea - like in Japan - was another reason for the government bond surge. However, the BOK's overnight call rate is already at a low level and a rate cut would be meaningless in the current situation where the market has lost its "credit channel" through which the rate cut would take effect. The corporate bond market is showing signs of life, but this is largely due to the government's guarantees. In other words, the signs do not translate into improvements in market fundamentals. Little progress is noted in the "four-sector restructuring plan" announced by the government, other than a couple of privatization plans for government-owned companies. The corporate sector remains idle on restructuring.

Government's financial backing may improve temporary figures, but the effect will not last long. The market wants a stronger reform, one that bolsters the economy's basic structure. Trying to figure out the government's reason for saying the economy will start recovering in the second quarter leaves me with the disturbing thought that the government is thinking of covering up cracks just temporarily until the economy, hopefully, meets the tailwind of recovering global economies in the second half - particularly, in the U.S. We certainly hope that is not the case. The stock market would welcome strong and decisive leadership on corporate reform. The reward will be stronger prices, which will justify resistance to government policy.

The writer of this article is a senior analyst at Daewoo Securities Co. - Ed.

by Lee Jong-woo