If Sleeping Beauty, the heroine of European folklore, were to wake up in Seoul today, would she know she had been asleep for 11 years?
The current account balance has teetered over into deficit, for the first time in 11 years. The Bank of Korea is busily shelling out dollars ($10bn worth in July) to shore up the currency, just as it was after the Asian financial crisis broke in 1997. Consumption and employment are falling and – just to ram the point home – Korea’s top economic policymaker invoked the spectre of 1997 in parliament last month.
This is not mere scare-mongering. Sure, Korea is in better shape today. Foreign exchange reserves, say, are seven times pre-crisis levels. But on some measures the country has gone backwards. External debt, which incubated the seeds of the 1997 crisis, surpassed $400bn at the end of the first quarter. In absolute terms, that is more than double 1997; it is also far higher as a percentage of national output. Notwithstanding a subsequent credit card crisis, Korean consumers are once more leveraging up. Household debt, at 80 per cent of GDP, is higher than it has ever been; ditto for corporate debt. On broad debt measures, including regional bank debt and bonds, HSBC calculates that corporate and household debt are more than 300 per cent of GDP, or half as much again as pre-crisis levels.
Last week’s rate rise, the first in a year, means servicing these debts is getting harder. Korean banks, the region’s most aggressive lenders, in turn look vulnerable. Tight liquidity at home has sent the banks scurrying as far afield as Thailand and Malaysia for funds. Moody’s Investors Services estimates that foreign currency accounts for 12 per cent of system funding. Although a massive collapse is not immediately on the cards, some of the fault-lines do look eerily familiar.
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