"Big bang" facing S.Korean industry

Dec 26, 1997 01:00 AM

Soaring interest rates will prompt a "big bang'' in South Korean industry, with survival of the fittest the order of the day according to analysts.
Many of the country's highly leveraged firms would collapse in the merciless world of a new South Korean economy, they said.
"The rules of the game are simple. High rates mean money shortages and many bankruptcies,'' said an economist at the state-funded Korea Development Institute (KDI). "They are certainly the prelude for a big bang.''
South Korea has said it would lift any ceilings on interest rates early next year and promote other financial reforms in return for $ 10 bn in swift aid offered by the IMF, along with many donor countries.
Seoul would also fully open up the bond market, speed up the opening of other capital markets and allow foreign banks and security firms to open wholly owned subsidiaries.
Yields on South Korea's benchmark three-year corporates tripled recently to around 30 % as the country's financial system was falling apart under the weight of the currency crisis.
"High rates will eliminate many sickly companies and keep healthier firms from expanding,'' said Koo Kyong-hoi, analyst at Dongwon Economic Research Institute.
South Korea's inability to get lenders to roll over short-term debt has been at the heart of the crisis. About $ 15 bn of an estimated $ 100 bn in short-term debt was falling due in December and another $ 15 bn in Januari 1998.
Fears that the country might declare insolvency pushed the dollar up to a record high of 1,995 won earlier this week, although it fell again to 1,498 by Friday's close.
The IMF's fresh loan arrangements calmed South Korean financial markets, with stocks recovering 6.74 % and three-year yields dropping by 2 percentage points.
"The crisis is far from over. Expectations of the dollar's rise still remained high,'' said an economist at LG Economic Research Institute.
Analysts said South Korea may have to raise interest rates further to attract dollar inflows.
"Even high rates will not work unless South Korea regains foreign investors' confidence about its commitment to a swift restructuring,'' said the KDI economist.
"The exit for escape is narrowing every day. Business conglomerates must slimdown really fast,'' said Yi Seung-kook, head of research at ABN AMRO Hoare Govett Asia.
Analysts said high rates, a weak won and low stock prices would also combine to create an ideal climate for foreign corporate raiders.
"South Korea appears to have offered all it can to foreigners simply to stave off its debt default,'' said an economist at the Korea Institute of Finance.
Foreigners are allowed from this month to buy 50 % of a stock and the limit would be waived before the end of next year.

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