Korea’s Short-Term Debt Reaches $100B

Korea’s short-term debt hit the $100 billion mark for the first time ever.

The ratio of short-term debt to the country’s total foreign debts also rose almost to the level it was shortly before the financial crisis in 1997.

It is hard to make a simple comparison between the current situation and that of 1997. But experts say that Korea should remain alert because a variety of variables surrounding the country’s economy do not look very favorable. Furthermore, there will be a presidential election in the country, just like there was one in 1997.

The Largest Ever Short-term Debt-

The Ministry of Finance and Economy said yesterday that the country’s short-term debt with maturity of less than one year reached a new high of $108 billion as of late September. That stands for a $42.1 billion rise from $65.9 billion at the end of last year and a $13.2 billion increase from $94.8 billion in late June.

The short-term debt amount, which stood at $49.6 billion in late 2000, showed a modest increase to $48.2 billion in late 2002 and $56.3 billion in late 2004 before it began to soar last year.

The ratio of short-term debt out of the total foreign debts was up to 43.3% as of late September, approaching 45.4 percent of 1997, immediately before the financial crisis broke out.

The ratio of short-term foreign debt out of the country’s foreign reserves also surged from 28.3% in late 2004 to 31.3 percent late last year and to 47.3 percent in late September.

The main reason for the recent surge is because shipbuilding companies are even selling the dollars to be paid in the future to the forward exchange market in advance on the prediction of the won appreciation.

A forward exchange contract means a promise of selling and buying a certain amount of foreign exchange at the certain fixed price at the certain point of time in the future.

Banks which bought forward exchanges from export companies need to sell foreign exchanges, including the dollar, in the spot market to hedge the risk of foreign exchange fluctuation, and they borrowed dollars needed in the process in the form of short-term debt.

Furthermore, banks received short-term loans in the yen from overseas, as more and more companies prefer loans in the Japanese yen for lower interest rates and the prospect for depreciation of the yen.

Korea Should Remain Alert-

A majority of experts explain that a deeper look at the surge of the short-term foreign debt reveals that the situation is quite different from that of 1997.

In particular, foreign reserves, which were at a mere $33.2 billion in late 1996 (and $4 billion in late 1997), now reach $234.2 billion, strongly supporting the Korean economy.

Also, the problem of “mismatching” resulted from the difference of maturity of bank loans in 1997 has been almost resolved.

When the financial crisis hit, Korean banks took short-term foreign loans with low interest rates and extended long-term loans with high interest rates. During the time of crisis, the banks failed to recover the long-term loans while they had to repay the short-term debts.

Heo Gyeong-wook, director of international finance at the Ministry of Finance and Economy, said, “Now the authorities are supervising banks to ensure that money borrowed in the short term is used for short-term loans and that their long-term foreign debt is used for long-term loans. Therefore, the mismatching problem almost disappeared.”

However, experts express their concern that a different problem from the financial crisis could emerge.

Kim Hyeon-wook, researcher of the Korea Development Institute, said, “It will be a problem if the rapidly growing foreign exchange increases domestic liquidity and is provided in the form of loans to households and SMEs.”

Experts also point out that the soaring short-term foreign debt could give a bad impression to foreign investors, giving a negative impact on the country’s sovereign rating.

sanjuck@donga.com