(AFP) – Oct 19, 2008

SEOUL (AFP) — Politicians are appealing for patriotism, the won is plunging and big department stores are offering major discounts.

South Koreans could be forgiven for sensing echoes of what is known as the "IMF crisis" -- the 1997 crash which saw the nation accept a 58 billion dollar International Monetary Fund bailout to avoid state bankruptcy.

While Asia's fourth largest economy faces a rocky ride amid global financial turmoil, most analysts rule out any doomsday scenario.

"Korea is in the clutches of a mini-credit crisis -- and I strongly emphasise the term 'mini,'" said Daniel Melser, senior economist with Moody's Economy.com.

"This is no Asian financial crisis redux but a mild dose of the similar-tasting medicine," he told AFP.

"This time round, Korean financial institutions are far better positioned to deal with the ramifications of their somewhat imprudent decisions."

Melser said the source of the problem was the surge in foreign borrowing over the past 12 months as US interest rates fell, with local banks borrowing short-term and cheaply in the US and lending at much higher rates in Korea.

"But they didn't bargain on the global credit crunch which now means that it's very difficult to roll over these loans. This has caused a scramble for dollars and the plunge of the Korean won."

The won has fallen around 30 percent against the dollar this year, making it Asia's worst-performing major currency.

But South Korea's foreign reserves of about 240 billion dollars -- 12 times larger than in 1997 -- could be used to ease banks' short-term funding needs.

Also, said Melser, many of these banks have considerable US assets which could be sold in emergency.

On Sunday the government announced a package of guarantees for banks worth 100 billion dollars, including guaranteeing overseas loans to Korean banks.

As the financial crisis unfolds, President Lee Myung-Bak has fingered greedy dollar-hoarders.

"Some businesses and individuals seem to think they can get rich quickly by hoarding dollars amid the won's crash in value. But individual greed should be put aside in times of national crisis," he said recently.

For some analysts, the president's economic team is part of the problem.

"The economic team led by Finance Minister Kang Man-Soo is not trusted by markets due to excessive intervention, inconsistent policy and incompetence," said Ha Joon-Kyung, economics professor at Hanyang University.

"They should have worked better to stop the won's excessive fluctuation."

But Ha said the country had learned lessons from 1997.

"Local banks have strengthened their financial soundness through restructuring and corporations have avoided excessive investment," he told AFP.

"The current account balance had been in the black in the past decade, helped by solid exports. It is now in the red but will swing to surplus again.

"Fundamentals are relatively solid, although there are problems with the real estate market, household debt and small and medium-size companies which are most vulnerable to an economic slowdown."

Hwang In-Seong, of the Samsung Economic Research Institute, said a fundamental factor in 1997 was excessive borrowing by big companies.

"As a result of restructuring, they have since reduced their debt ratio to improve their financial structure," he said. "The current account deficit caused by high oil prices is also temporary."

The corporate debt to equity ratio has fallen to around 100 percent compared with 420 percent in 1997.

Hwang said the most vulnerable sector was the housing market but even here price rises had been smaller than in other advanced countries.

South Korea will undoubtedly face a slowdown as the financial turmoil hits the real economy in the United States and Europe.

Exports account for about 40 percent of gross domestic product and some export sectors are already slowing down to those destinations. But Hwang noted that South Korea has diversified its markets abroad.

International agency Moody's announced Friday it is maintaining its sovereign credit rating on South Korea, saying it is much better placed to weather the current financial crisis than in 1997.

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