False alarms

Recent comments and analysis on the Korean economy by some English-language media, which underscore the double whammy of foreign debt risk and the tumbling value of our local currency, provide an inflated and unfair picture of the market. They only serve to whittle away at investor confidence.

In its latest edition, The Economist gave a list of countries next in line to become victims of the emerging-market crisis contagion, naming South Korea as the fourth most vulnerable after South Africa, Hungary and Poland. In its agenda-setting Lex column, the Financial Times highlighted concerns about foreign debt financing by Korean banks and firms. Its logic was that European banks, which hold 58 percent of Korea’s total foreign liabilities, may revise their lending plans here following the debacle with their Eastern European portfolios.

No one can argue that the Korean market is now unstable. It is also true that the short-term external debt ratio is high, and banks’ deposit-to-loan coverage ratio is relatively low. But the situation should not be overblown.

Bank deposits also increased since the second half of last year as funds migrated from the weak stock market to banks offering high returns. Statistics prove the short-term debt and deposit-to-loan ratios have decreased.

The economic fundamentals also cannot be compared to the 1997-1998 crisis period. The economy deteriorated, shrinking 5.6 percent in the final three months of last year, but few economies have escaped the unprecedented global slump. During the same period, the U.S. economy contracted 6.2 percent. Korea remains better off than other exporters like Japan, Taiwan and Singapore, whose overseas sales are impaired by strong currencies and poor demand.

Largely thanks to the weak won, Korea returned to a surplus of $3.3 billion in its trade balance last month. To label the Korean market as hazardous and risky is disproportionate. Some European funds, still sensitive from the crisis in the Eastern European markets, are showing signs of moving out of the local market.

The won has also tumbled to an 11-year low. In times like these, even the slightest rumor can have devastating consequences. The government must be aggressive in providing an accurate picture of the Korean economy, as it should know from its IMF experience that too many false alarms bode badly for the country’s credibility.