Standing tall after surviving hard times

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Standing tall after surviving hard times

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Korea’s companies and banks survived the recent global financial crisis, having undertaken restructuring after the 1997 financial crisis. [YONHAP]


Korea may feel a sense of accomplishment now as it surveys the fumbled response by the advanced economies of the United States and Europe to the 2008 global financial crisis.

When the Asian financial crisis engulfed Korea in 1997, the country was blamed for crony capitalism, propping up “zombie” conglomerates that were too big to fail, and operating a financial sector carrying excessive debt. Now many of those same criticisms are being made about the troubled Western economies.

The struggle in the U.S. and Europe against vested interests in the wake of the recent financial crisis contrast with Korea’s quick response to the fallout from the Asian financial crisis a decade prior.

Korea answered to pressure from the International Monetary Fund and other overseas lenders. Seventeen of the top 30 debt-heavy conglomerates were closed down. Half of the banks disappeared. Restrictions on foreign investments were removed, and the social safety net was greatly expanded. By 2001, Korea was able to pay off the last of the money it owed to the IMF.

More importantly, Korea’s extensive restructuring a decade ago meant the country has had a relatively easy time dealing with the effects of the 2008 global financial crisis. The economy slowed to 0.2 percent growth in 2009, but has since roared back with a growth rate of 6 percent this year.

There was no need to bail out banks as in advanced Western countries. With the corporate debt ratio now less than 100 percent - compared to 300 to 400 percent a decade ago - and with foreign reserves close to $300 billion, Korea can worry less about a sudden outflow of foreign capital, which brought the nation to its knees in 1997.

This renewed sense of confidence comes despite the fact that Korea’s short-term foreign-debt exposure, the immediate cause of the 1997 crisis, is still among the highest in Asia.

“The vulnerability still lingers on, although the authorities do still have more ammunition, and better regulation as well, to deal with any instability in the markets,” commented Capital Economics, a London-based consulting company.

Still, the government’s fiscal position is much stronger compared to many other member states of the Organization of Economic Cooperation and Development, the club of rich nations.

Korea’s government debt this year is estimated to be 33.4 percent of gross domestic product - lower than the OECD average of 53.8 percent and much lower than the 90 percent in the U.S. and 200 percent in Japan. Korea is now aiming to have a balanced budget by 2013-2014.

And because Korea’s sovereign-debt situation is strong, this means that it will have little trouble borrowing overseas funds if necessary.

Nonetheless, some economists worry that national-debt levels could rise sharply in the future as the country’s long-term growth potential slows.

In its recent annual report on Korea, the IMF pointed out that medium-term growth trends are likely to settle below the level of the last decade because of weaker export demand from advanced economies, a rapidly aging labor force, high household- and small-business debt, and the low productivity of the service sector.

The biggest cause of concern for the nation’s future financial stability is the rapid rise in welfare spending.

As the IMF said: “Korea has a strong fiscal position by international standards, but is faced with a rapidly aging population.”

Korea is expected to have world’s fourth-largest percentage of people aged 65 or older by 2030, with the elderly expected to account for around 24 percent of the total population, according to the OECD.

With one of the world’s fastest-aging populations, the national pension scheme and the state health insurance system, though currently in surplus, could face severe financial strains in the future.

Welfare spending is already the biggest item in the national budget, accounting for 27.9 percent of government spending next year at 309.6 trillion won ($273.7 billion).

Another source of concern is the buildup of debt by state companies and agencies, such as the Korea Land and Housing Corporation, which alone accounts for half of this debt.

By Lee Ho-jeong [ojlee82@joongang.co.kr]

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