Financial market vulnerable to shock

The International Finance Center, the government`s foreign currency crisis inspection agency, has warned the possibility of a second currency crisis. According to a report submitted to the Chong Wha Dae by the IFC, given a massive outflow of foreign capital, the US$ 90 billion in foreign exchange reserves may not be sufficient in preventing another foreign currency crisis.

The report states that a sudden exodus of foreign capital and the liberalization of the domestic market will not automatically trigger a foreign currency crisis. However, such statement is quite different from the government¡¯s former position that the "recurrence of a foreign currency crisis is impossible", and is now stirring attention.

The report entitled ¡®The Effects and Problems from the Increase of Foreign Equity Investments`, noted Korea¡¯s financial market has become susceptible to external shocks due to the increase in foreign investment in the local bourse. A recommendation was made to the government asking for measures to prevent sudden outflow of capital. If a US$50 billion extension for short-term foreign debt encounters problems, and 20% of foreign equity invested leaves with local capital investment, a crisis similar to 1997 may occur.

A few private research institutes have mentioned this crisis theory on the Korean economy but it is unprecendented that a quasi-governmental institute has warned of a crisis and demanded action from the government. The financial sector is watching closely as the issue has been raised during a period when the Indonesian Rupiah and other Southeast Asian currencies have plunged. Indonesia and other Southeast Asian nations were at the center of the Asian financial crisis 3 years ago.