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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Worswick who wrote (7844)	1/11/1999 2:02:00 PM
From: Thomas M.	Respond to of 9980

forbes.com Thanks to that IMF transfusion, South Korea's economy is looking healthier. Appearances are deceiving. Symptom Therapy By Neil Weinberg THE KOREAN STOCK MARKET has doubled since June. Korea's current account surplus will approach $40 billion in 1998, while its currency reserves are up from $7 billion late last year to a record $46 billion. The won has gained 60% against the dollar, and three-year domestic corporate bond rates are down from 30% to 7.8%. But the celebrating is a bit premature. Korea is like a patient revived by a blood transfusion by doctors who do nothing to stop the hemorrhaging. The transfusion came as a $58 billion IMF-led loan package. A big part of the gain in the Bank of Korea's reserves has come from delaying $22 billion in short-term foreign debt payments. The country will need every penny it can accumulate from the trade surplus because some $36 billion in foreign debt will come due next year. The current account surplus has been impressive enough, but it has been achieved only through painful sacrifice: IMF-imposed austerity will this year depress domestic demand 25% and GDP around 7%, leading to a 22% drop in imports, estimates Paribas Asia Equity. The basic organic problems remain untreated. The financial system is a mess, and the country's chaebol, or corporate conglomerates, still sprawl inefficiently across industries. The government is supposed to recapitalize the banking system with a $51 billion injection of public funds plus $15 billion in new bank debt and equity. The total comes to $66 billion—not much against nonperforming loans running anywhere from $110 billion to $220 billion. That's 33% of GDP, minimum, versus the 3% of GDP it cost the U.S. to mop up its savings and loans mess a decade ago. Instead of folding weak banks, the government is merging many of the weak with the weak. "With few exceptions the financial profiles of banks mentioned [as merger candidates] are too similar to benefit from mergers," Standard & Poor's wrote in June. Worse, Korea's grossly overleveraged chaebol (average debt ratio 520%) are doing almost nothing to cut debt. Except for a handful of well-publicized deals, like Hansol Paper's $1 billion sale of its newsprint paper operations, asset sales are dragging. Among the big five chaebol—Hyundai, Samsung, Daewoo, LG and SK—there's not even a pretense of deleveraging. Their debt levels have actually been rising, thanks to deals like Hyundai's recent purchase of bankrupt Kia Motors—a transaction so laden with debt that Ford Motor, already a big Kia shareholder, showed little interest. The big five chaebol have sold $28 billion in domestic bonds this year, hogging 77% of the bond market. While President Kim Dae Jung applies intense pressure on these corporate behemoths to swap businesses, they are, in effect, thumbing their noses at the government's and the IMF's efforts to create a more open, competitive economy. President Kim recently held a dinner to honor chaebol heads who had helped restructure. Not a single chief of the five biggest groups was there. Kim apparently could find nothing to honor them for. "We need to cut off some legs of the octopuses, but the [big five] chaebol owners aren't willing to do it voluntarily," complains Kim Tae-Dong, senior presidential secretary for policy and planning. "In the U.S. shareholders might vote them out. In Korea they dominate with complex cross-shareholdings, so what can we do?" The government is pushing chaebol-owned Hyundai Electronics and LG Semiconductor to merge. Close plants or sell some to foreigners? Heaven forbid. The new entity would still have a 400% debt ratio, versus 50% or less for Taiwanese rivals. "Two bad companies don't make a good one," says Keunmo Lee, head of research at KEB Salomon Smith Barney. "If I were grading Korea's corporate restructuring, I'd give it an F." The vast majority of efforts by foreign firms to get a foothold have been resisted or fallen apart over price, job cuts and control issues. "In the West creditors come in and say, 'You have no hope of making a profit, so you're done,' " says George Goundry, an analyst at ABN Amro Asia in Seoul. "In Korea they keep the walking-dead walking. Market forces still aren't determining values." Is the IMF-bought breathing room being used to throw good money after bad? It sure looks that way. "All the interest [in investing in Korea] has been disappointed," says Florian Budde, a principal at McKinsey & Co. in Seoul. "People are starting to look to invest in Japan instead." Seoul's first-class hotel rooms, once jammed with deal-seeking foreigners, fetch 30% or so less than they did a year ago.