South Korea 'needs $100bn rescue' as currency dives

The Korean won plunged by 10 per cent yesterday as speculation mounted that the country's government may need a $100bn (pounds 59bn) bail-out from the International Monetary Fund to stave off its growing economic crisis. Stephen Vines in Hong Kong reports.

If Korea has to swallow its pride and go to the IMF for help, the world's eleventh largest economy will need the kind of assistance which makes past bail-outs look modest. Japanese analysts are saying that Korea could need up to $100bn. If this is correct it would be by far the biggest IMF rescue, overshadowing the Mexican bail-out, and putting the recent help to Indonesia and Thailand very much in the shade.

Officially the Koreans are still insisting that they have no need to go to the IMF and are expecting direct bilateral assistance from Japan and the US or from a combination of neighbouring countries. There is also some vague hope that the Japanese government will persuade banks to roll over short-term loans. However, both the Japanese and the Americans have indicated that they would prefer to contribute to an IMF package carrying stiff terms for repayment and implementation.

The Centre for Asian Studies at the Japan Research Institute yesterday estimated that Korea would need between $50bn and $100bn to get out of the present financial crisis. It pointed out that South Korea has an external debt of $110bn, $20bn to $30bn of which needs to be repaid before the year-end. In addition the government is being pressed to rescue a large number of financial institutions which are about to become engulfed in a sea of bad debt.

Officially Korea is supposed to have $30.5bn in foreign reserves but many analysts believe that half this sum has been spent in an effort by the Bank of Korea to prop up the Korean won.

On Wednesday Korea's new Finance Minister, Lim Chang-yuel, announced what was billed as a far reaching financial reform package, and yesterday investors delivered their verdict. Within 15 minutes of Seoul's foreign exchange market opening yesterday, the Korean won fell by 10 per cent against the US dollar, taking it to a record low of 1,139 to the greenback. The value of the won has plunged 16 per cent this week.

Part of Wednesday's reform package was an extension of the band on currency trading allowing daily fluctuations of up to 10 per cent as opposed to the previous limit of 2.25 per cent.

Practically no one believes that the won's fall has been completed. The most pessimistic analysts are predicting that it will slump to 1,400 against the dollar; the most optimistic assessment is that it will stabilise around 1,200.

Share prices in Seoul, which managed a weak rally on Wednesday following Mr Lim's appointment, found the effort of optimism to be too taxing and the market fell back by almost 3 per cent yesterday.

While the financial markets are taking a battering, the Korean economy has continued to grow with vigour. Bank of Korea figures released yesterday show that gross domestic product for the third quarter was up 6.3 per cent. Mr Lim, the finance minister, says the economy is on course for 6 per cent growth for the year as a whole. This compares with 7.1 per cent growth last year.

Exports are busy stoking the economic machine. In the third quarter exports registered an impressive 29 per cent growth year-on-year. This compares with just 8.2 per cent in the equivalent period last year.

Although the good economic figures should have produced optimism, a strong indication of the consequences of the financial weakness was provided by the capital investment data, which showed that investments had declined 13 per cent, compared with a 9.3 per cent growth in the previous 12 months.

The weakness of the won provides a prop to exporters but the financial crisis is generating ever-rising interest rates which are acting as a formidable drag on corporate profitability.

While Korea remained a leading contender in the gloom stakes, Malaysia offered strong competition yesterday with the stock market plummeting by 11 per cent in a single day and the local currency slumping to its lowest rate of exchange since 1973.

The lethal mix of economics and politics is behind the gloom in Malaysia which has seen 20 per cent knocked off share values in the past week.

First came news of what looked like a political motivated bail-out of a company controlled by the ruling party. Then yesterday, a leading company pulled out of the nation's leading hydro-electric project, leaving the government to pick up the pieces.

These developments are giving investors a feeling that the already weak stock market is developing into a political football.