The Korean economy under neo-colonial siege.
October 23, 2000
Dark and ominous clouds are gathering over the economic horizon in the South Korea, while people are on an euphoric mood induced by the high doses of the unification and Nobel Peace Prize pills that DJ Kim has prescribed for.
Wall Street financiers do not have as stupidly emotive and childishly wishful incentives as most of the South Koreans have showed during a few weeks, and the Seoul bourse has not positively responded with the possible windfall effects on the future investments in the North Korea where its infrastructures are not ready to absorb the inroad of capital plunders from the South.
Rumors abound about the crisis facing major conglomerates and financial institutions, and DJ’s regime has been lackluster in dealing with the faltering economic situation, while many data reveal that the future economy is heading for the trouble.
As a poster boy for the globalization, DJ has emphasized that top priority for his economic policies are placed on the market forces by ways of his faltering restructuring programs.
However, his financial mandarins become the whipping boys to seduce, coerce, and blackmail the financial institutions for tight government control.
He has made treachery and duplicity his bywords in every aspects of the economic policies.
Here are some dark phenomena in the South Korea’s economic reality.
1. Short-term foreign debts and interest payments on the rise.
The short-term external liabilities, which South Korea must pay within one year, rose to $46.2 billion in April/2000 up $2.8 billion recorded in March and it has been on a steady rise since late 1998 (the ratio to total foreign debts stood at 32.9 percent, its highest level from 20.6 percent in 1998 and 27.8 percent in 1999). In addition, the ratio to the foreign exchange reserves, an essential measure of the country’s liquidity, rose to 54.6 percent at the end of April.
As a rule of thumb, the below 60 percent ratio to the exchange reserves is considered a “comfortable” level limit, the rising pattern is not comfortable considering the fact that the liquidity crunches in the domestic financial market has forced the major firms rapidly to borrow the high-interest funds from the overseas market.
The service burden for the external debts has been on a steady rise, with interest payments on foreign loans amounting to average $6.4 billion annually since 1995 up to $7.2 billion last year and estimated at $8 billion at the end of this year (for five years South Korea paid total of $32 billion for interest payment only).
2. The Seoul bourse under the control of the Wall Street
The Seoul bourse has plummeted to the lowest 525 point in the year despite of good news of Nobel Peace Prize.
Few South Koreans realize that they are not the major players in the Seoul bourse but the institutional investors like Goldman Sachs, Citicorp, Merrill Lynch, Dean Witter and AIG, the Trans-national corporations which are not accountable to any country but their shareholders.
Foreign investors have increased their influence on the stock market massively in two years since the government abolished the limitation on foreign holdings on May 1998.
The total market valuation of shares held by foreign investors accounted for 28.5 percent as of May 2000, compared to 19.9 percent on May 1998 investing 70 trillion won, up 400 percent increase from 15 trillion won in 1998.
When the New York stock market fluctuates to adjust its over-valued and speculative stock prices, the South Korean bourse is sucked to the tailspin of the whirlwind gyration and DJ’s financial high priests have absolutely no remedy to arrest the turmoil.
Consider the sobering fact that the foreign investors pull out 20 percent of their holding would result in capital outflow of over $10 billion en mass in a short period.
The foreign investors are heavily exposed to banks and securities firms such as Kookmin Bank with Goldman Sachs (158million shares, 11.07 percent compared with 4 percent in government holdings), Korea Exchange Bank with Commerzbank (31.6 percent of total shares).
Other major industries are; Korea Electric and Power Corp. (KEPCO) with 152 million shares, Hyundai Electronics with 132 million shares,
They poured 26 trillion won into Samsung Electronics, and 8.8 trillion won for SK Telecom.
People still entertain an illusory dream that DJ Kim, their charming people’s president, would act and rectify the economic wrongs without knowing that he has been selling out the whole shebang of the national treasures and he has been emptying the coffer of the tax payers for the financial restructuring in order to solicit the world financiers.
The South Korean economy is not at the helms of the DJ’s regime but at the whimsical behaviors of Wall Street robber barons that gobble up ravenously financial sectors, properties, and even insolvent debts.
Take for example, GE Capital has so far bought $400 million worth of bad debts, with Goldman Sachs for $300 million and Morgan Stanley Dean Witter for $700 million.
When KAMCO and Korea Deposit Insurance Corp (KDIC) begin to unload their estimate bad loans of 10 trillion won, its insolvent debts market is the second largest in Asia after Japan’s, and foreign buyers pick up the bad assets at cheap prices and reap hefty profits after recovering the debts or selling collateralized real estate at higher prices.
3. Unhealthy financial institutions.
Most of the financial institutions like the merchant banking industry, investment and trust corporations (ITC), and banking industry have been suffering from the heavy exposures to the insolvent Daewoo crisis.
Last year, DJ’s government has forced the financial institutions to extend four trillion won in loans to Daewoo guaranteed by the ten trillion won worth of collateraled commercial paper (CP) on Daewoo assets and DJ promised to full cover if the institution ever sustain any losses through the transaction.
When Daewoo was placed under a debt workout program in November 1999, the value of real estates and stock holdings of Daewoo assets that backed its CP was reduced to 1.4 trillion won from 10 trillion won and DJ’s financial boys refuse to cover the loss of the financial institutions.
First, Nara and Yeungnam Merchant Banks have folded their businesses affected by its provision of call loans worth trillions of won to the Daewoo Group, and Korea Merchant Banking Corp (KMBC) fell into liquidity shortage when Nara went bankrupt because KMBC has bought 180 billion won of commercial notes from the Nara bank.
There are only nine merchant banks, a sharp decline from 30 in 1997, and their deposit has been steadily outflowing to more secure banking industry causing liquidity crisis spread to others in a domino effect. With scarce deposits, they do not have funds to engage in their major business, promissory note discounting.
Secondly, investment and trust companies (ITCs) provided Daewoo with 2.8 trillion won in loan by purchasing their CP that they lost substantial amount (460 billion won) of their investment, because the Korea Assets Management Corporation (KAMCO), a holding company to absorb the non-performing loans, suggests the 60 percent coverage of the price the ITCs provided.
One of the biggest trust companies in South Korea that holds 16 percent market share in the local asset-management industry, Hyundai Investment Trust and Securities Company (HITC) has acquired $815 million (900 billion won) from a New York-based consortium consisting of American International Group (AIG), GE Capital Corp (GECC), the state of Wisconsin investment Board, California Public Employees’ Retirement System (CALPERS), Transamerica, and W.L. Ross & Co.
The HITC requires 1.2 trillion won for recapitalization due to heavy exposure to Daewoo loans and they have no other choice but to sell off their valuable shares to the foreign corporations, losing grips on the major financial institution (AIG becomes the largest shareholder in HITC).
American International Group (AIG) has become so powerful and influential in the financial market in South Korea that the Group calls for the Korean Government various demands tantamount to the roundabout injection of the another public funds into the private corporation and blackmails they may pull out from the $1 billion deal with Hyundai as the Ford company did in the Daewoo Corp., in which the pullout rumor hit the stock market that tumbled the drop of index reaching 37 points.
Thirdly, the commercial banks are forced to contribute 8 trillion won to its proposed 10 trillion won for capital market stabilization funds (2 trillion won is shared by insurance firms).
The funds were to create bond funds that local institutional investors like the National Pension Fund or bank deposit accounts chip in to buy corporate bonds in order to alleviate the liquidity crunch at corporation.
It is bizarre that the government try to force the bank to invest in low-credit corporate bonds with the depositors’ money as in Daewoo case. If purchased bonds turn bad, the banks assume the burden of bad loans that has to be rescued by KAMCO and like a game of musical chair some one has to absorb the loss that eventually ends up with the taxpayers.
One exception is that the Korea First Bank which is run by a foreigner-owned Newbridge Capital-led consortium has refused to take part in the plan and DJ has no power to force them to accept it because he sold the bank to the Wall Street financiers.
In the United States, the citadel of the capitalistic system, no politicians have dared to touch the Social Security Funds that have provided retirement money for the elderly people, because no one wants to stir the ire of elderly voters. It is questionable whether the South Korean contributors of the pension are aware of the risks that their precious retirement money may disappear in the din of the stock market.
Basically, DJ’s restructuring is a stop-gap policy that lacks consistency and continuity, because the government try to seek for an instant and myopic solution that might avoid an instant collapse of the financial stability.
As a result, a lot of mid-sized businesses have been experiencing liquidity crunches as the financial institutions find it hard to float bonds as well as commercial paper in order to lend money for them. And many companies with B-rate credit ratings could not roll over maturing bonds and loans due to the reluctance by the lending corporations.
The amount of corporate bonds that mature by the end of this year is estimated to reach 32 trillion won with those issued by B-class companies taking up about 40 percent of the total.
4. The external factors.
The first and foremost factor that influences the South Korean economy is the sky-high crude oil price. Last year, South Korea has spent over $14 billion, almost equal to exports of semiconductors, $14.3 billion, in which the price of its basic chip tumbled down to $4.15 approaching rapidly to the cost of production, $3.50 this year.
If international oil price is leveled at an average of $35 per barrel, the current account deficit would reach more than $5 billion next year, and considering the tension in the Middle East and the increased consumption of the large industrial nations, there is no hope that the oil price will fall under the $30 per barrel.
In addition, DJ regime has no other excuse to defer the IMF pressure to liberalize the foreign exchange transaction next year that increases risky exposure to the highly-speculative international financial institutions like hedge funds that loam around the world like a hungry shark.
According to the recent report, foreigners held 30 percent of total market capitalization, compared to 14 percent in Japan and 10 percent in Taiwan.
Few South Koreans still remember what the government in May 2, 1997 promised to implement in exchange for financial support from the IMF in a “Letter of Intent” signed by the Governor of Korean Central Bank and Minister of Finance to Michel Camdessus, Managing Director.
The following is an excerpt:
Appoint outside experts to assist Privatization Committee to develop privatization strategy for Korea First Bank and Seoul Bank
Select a lead manager for privatizing KFB and SB.
Obtain bids for KFB and SB by November 15,1998
Submit legislation to abolish regulations that prohibit foreigners from becoming bank managers by June 30, 1998.
Comprehensive review of all remaining restrictions on corporate foreign borrowing, including restrictions on borrowing of 1 to 3 year maturities, as part of review of Foreign Exchange Management Law to be completed by December 31, 1998.
Submit legislation to abolish restrictions on foreign ownership of land and real estate properties by June 30 1998.
Increase the permitted equity ownership by foreigners of Korean telephone service providers from 33 to 49 percent by January 1,1999.
Permit equity investment in non-listed companies and eliminate aggregate ceiling on foreign investment in Korean equities by December 31, 1998.
Submit legislation to fully liberalize rules on takeover of non-strategic Korean corporations by foreign investors by eliminating the ceiling on the amount of stock foreigners can acquire without approval by a company’s Board of Directors by June 30, 1998.
Permit foreigners to engage in securities dealings, insurance, leasing and other property related business by April 1, 1998
Contrary to the public conception that IMF and World Bank are vital sources of rescue operation on the financially troubled nations, they are an international cartel to make the loans on their terms and to make sure the debts are serviced.
As mentioned above in Letter of Intent, in the course of lending procedures, these multi-lateral lending institutions have gained enormous power to determine which countries will receive the loan, placing arbitrary restrictions on the financially weaker nations that are eventually losing control over their own economic policies…that is, the sovereign nation has no recourse to execute or redress the economic measures for the sake of their own people.
Korean people were told by the IMF and their political leaders that they must implement the structural reform in order to get more loans to pay off the old loans.
The fact of the matter here is that IMF would not really want to have their loans repaid and force the borrowers to roll over the debts endlessly, because banks make a profit from interest on loans, not repayment of the loans.
One of the reasons these lending institutions are happy to make loans to government is that they do not expect the loans to be ever repaid, and willingly to roll over the old loans by purchasing new treasury bonds or other state bonds.
The problem is the public is ignorant to know that they are the final bill payers through the currency depreciation, cost of living increase, and exorbitant taxation rates, and that they made a deal with devil, IMF, when they opened themselves to the animal spirit of global capitalism.