Real economic outlook grim

The real economy, which enjoyed a rapid recovery due to the long-term delay of the government`s financial and industrial restructuring caused by protests from the affected sectors, looks to be headed for a deep freeze.

Many have raised concerns about the nation`s economic future. According to these worries, inflation, which had been kept in check by the low interest rate policy, is beginning to rise, and with the slow-down of export goods, many fear that by next year, the trade balance may drop into the red.

Currently, the spread of instability in the industrial sector has led to financial instability, which has caused a deep freeze in the money market and led to domino bankruptcy rumors in certain businesses.

Many foreign financial and credit rating organizations have judged Korea to have successfully overcome the economic crisis in comparison to other nations. However, they have expressed concern with the current administration`s failure to obtain early victories with the string of reforms. This could lead to the lowering of the Korean national credit rating once again and to the migration of foreign investment dollars out of the country.

Hyundai Economic Research Institute singled out the problems facing Korea as the possibility of a lower credit rating, the extended economic slow-down and the increasing anxiety felt by the body of economic movers. The institute further stressed that the possibility of credit line freeze due to financial instability and the slow down of the object economy could cause a nose dive much earlier.

On August 22, President Kim Dae-Jung attended the first economic policy revision meeting led by the newly installed Minister of Economy Jin Nyum. At the meeting, discussion centered around the re-establishment of principles and schedules for business, financial, labor and public institutions reforms as well as defining the direction of the current administration`s second economic team.

A source in the Ministry of Finance and Economy revealed that with President Kim starting the second half of his term, he has re-elucidated his decision to pursue reforms ever more aggressively and called for a more sincere and thorough discussion of economic policies.

According to top Asian economy analyst Andy Jaee of Morgan Stanley and Dean Witter & Co., the current debt ratio of businesses, which stands at 225% (on the consolidated financials statement basis), is much too high for them to successfully handle. He advised that in order to meet with the international standard of a debt ratio below 200%, the businesses must sell off 50 trillion won of combined assets, equaling 10% of the gross domestic product. Furthermore, the hidden debts between the affiliated arms of companies would raise that amount to 30% of the GDP, or about 150 trillion won.

Many foreign investors have pointed out that while on the surface it appears as though Korean businesses have lowered their debt ratios, it did not come about through repayment of debts. They pointed out that the debts have been concealed through "cooking the books" between affiliates.

The director of audit at Korea Bank, Chung Myung-Chang, has maintained that business and financial reforms must be carried out simultaneously. He added that should the government inject pubic funds in the second half of this year to keep non-viable businesses afloat, it would only worsen economic instability.

A source in the Hyundai Economic Research Institute stated that there is a possibility of another credit freeze due to conflicts in financial and business reforms. Also, the lack of ability to provide a bridge for the corporate finance structure could lead to comprehensive economic crisis or to an extended economic slowdown. He said that the current economic team should not spend too much time chasing a new policy, but focus on bringing current reforms to a successful close.

Various experts noted that for Korea to reclaim the foundation of stable economic growth, it must 1) pursue macro-economic stabilization through maintaining low interest rates and current account surplus, 2) pursue consistent economic policy and heighten credibility, and 3) pursue a simultaneous reform of businesses and financial institutions to promote an interrelated symbiotic structure.

Park Won-Jae parkwj@donga.com