The credit woes in South Korea. Could this be the next shoe to drop for Asia’s economic powerhouse?

 

South Korea, a country known for its world-renowned brand icons such as Samsung, Hyundai, and pop/dance sensation, Psy, is currently facing an economic slowdown just like many of the major Asian economies such as China, Taiwan, Hong Kong, and Singapore. Moreover, the current economic woes faced by many South Koreans have been much centred on the weakness of the Japanese Yen, which resulted in the wide divergence between the foreign exchange differences between the South Korean Won and the Yen. The disparity of both currencies has impacted much of South Korea’s trade competitiveness, and is a cause of major worries for many South Korean policy makers in trying to ensure that it maintains its robust exports.

In a May 28, 2013 Yonhap News Agency (a major South Korean news bureau) report, it quoted that a business sentiment gauge measuring expected business conditions came in 97.2 for June 2013, down from 99.8 recorded in May 2013. The gauge measured among 600 companies by the Federation of Korean Industries (FKI). The index stood above 100 for March and April 2013, but fell below par for the second straight month, indicating the growing pessimism among many South Korean companies. According to the News Agency, exports account for approximately 50.0 percent of the overall Gross Domestic Product (GDP). A separate index measuring larger companies’ assessment of current economic conditions reached 97.6 for May, up from 94.1 tallied for April. This increase might indicate the difference in the economic assessment among many small businesses, which do not have the sufficient resources to fend off major cost increases, and have to rely on export-oriented growth in order to stay competitive. On the other hand, the chaebols or conglomerates such as Samsung and Hyundai have diversified businesses across various sectors which naturally do provide a ‘soft landing’ when it comes to managing its business operations worldwide.

South Korea’s household credit issues have recently came into light recently with a Bloomberg.com news article, published on March 25, 2013 mentioning that South Korea, under its new President, Ms. Park Guen Hye, has established a fund to spend 1.5 trillion won (USD 14.4 billion) over five years to assist low-income borrowers restructure defaulted loans. President Park has made this effort as an affirmation of her previous election promise to help ease the consumer debt burdens.

According to the Bloomberg.com report, approximately 4,000 institutions including banks and consumer lenders will join the “National Happiness Fund” to purchase or reschedule the overdue loans. This news was later confirmed by the country’s Financial Services Commission in an emailed statement to Bloomberg. According to the news article, it was estimated that the fund will help more than 300,000 borrowers. Also, a startling statistic stood out in the news article that reported that as of December 2012, household debt rose to a record 959.4 trillion won, and the country’s central bank said in January 2013 that swelling consumer debt was considered to the biggest threat facing the country’s financial system.

The issue of consumer debt and the amount of delinquencies has cast a shadow over South Korea’s ability to withstand another credit crisis, or is there a credit crisis already emerging in the country, given the economy has not shown much improvement as a result of the weakness of its currency, the won? Recently, Bloomberg News cited one of the Japanese ministers commented that South Korea policy makers should deal with their own economic woes, rather than to blame on the weakness of the Japanese Yen as the main cause of their export slowdowns. This issue brings home the point that there should be an emphasis on fixing the country’s debt woes, rather than to worry about the Yen’s weakness, which impacted not just South Korea, but global economies as well. In my opinion, it is difficult and quite subjective in directly pinpointing the weakness of the Japanese Yen currency as a root cause of South Korea’s current economic slowdown. There could perhaps be many issues, including the lack of entrepreneurship culture, or worst, the country is losing its competitive edge.

President Park has a lot going for her in her inaugural term in the office. The ongoing tensions with North Korea, coupled with the various economy woes reminds many people of the credit unwinds that took place during the late 1990s following the Asian Financial Crisis. At that time, the South Korea people were willing to donate part of their gold bullion holdings, wedding accessories, etc. in order to revitalize the economy. However, this might not turn out the case as the newer and younger South Koreans might not be willing to ‘bite the bullet’ and go through a period of debt restructuring in order to avoid a major credit crisis that might not only have severe repercussions on its economy, but also the rest of the Asian economies. It is therefore vital that the administration under President Park should countered the debt woes in an aggressive manner in order to prevent the déjà vu effect of the last economic crisis during the late 1990s, which saw its policy makers seeking the assistance of the International Monetary Fund (IMF) for financial assistance. The consumer debt issues should be tackled with in order to prevent any spill-overs, much like the ongoing European currency crisis that was triggered off by Greece’s debt woes.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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