SEOUL, Oct. 10 (UPI) -- Is South Korea, one of Asia's fastest-growing economies, tumbling into recession in the wake of growing concerns over the U.S. economy and volatility in global financial markets?
Government officials remain confident that the country can sustain solid growth despite a global slowdown, but concerns are rapidly mounting about an economic downturn as its two main economic growth engines -- domestic consumption and exports -- are losing upward momentum.
Some economists warn that the world's 13th largest economy may slip back into an economic crisis if South Korea fails to cope with the challenges of rising oil prices and market turmoil from a possible war against Iraq.
Morgan Stanley also warned of a rising risk of a hard landing for the South Korean economy, citing slowing exports and local credit bubble.
Fueling the fear, Seoul's stock indexes hit fresh yearly lows on massive foreign selling on Thursday, responding to the wide array of negative external news. The bellwether Korea Composite Stock Price Index plummeted 5.79 percent to 584.04 point, marking the market's biggest percentage drop since June 25 and the lowest close since Nov. 13, 2001. The index has fallen 37 percent from an April high.
The over-the-counter Kosdaq also slid 4.56 percent to 43.74 points, the worst finish in its six-year history. The index is less than one-sixth of a record 283.44 registered in March 2000.
In another sign of worsening business condition in South Korea, foreign direct investment tumbled 44 percent to $589 million on year in September.
The commerce ministry attributed the plunging foreign investment to caution over global economic uncertainties in the wake of a U.S. stock tumble. "The latest indicators signal a further decline in the global economy," the ministry said in a statement.
South Korea's external debt rose to $129.6 billion at the end of August. The total foreign debt was equivalent to about 30 percent of the country's gross domestic product.
Local corporations, which are usually the most sensitive to economic conditions, are bracing for belt-tightening next year, citing deteriorating business conditions and decreased private consumption.
The country's major business conglomerates, including biggest Samsung Group, said they would implement massive cost cutting and belt-tightening measures next year by freezing wages and investments.
As part of efforts to tackle growing signs of economic woes, the central bank, Bank of Korea, on Thursday decided to leave the target for the overnight call rate unchanged at 4.25 percent, near a record low level, despite calls for a hike in the key interest rate to curb with rising individual debt defaults and inflationary pressures.
BOK Gov. Park Seung explained the weakness of the stock market was a key factor behind a decision to keep interest rates law, saying he has "reasons for both raising and lowering rates but the slump in the stock market over the past several days had an important impact on the decision."
The bank "was increasingly concerned about the impact on the economy of the global recovery and the crisis in Iraq," Park said. But South Korea's economy remains on track for six percent economic growth this year, he added.
Other bank officials voiced concerns a rate rise could trigger further plunge of the domestic stocks and a rapid deflation of a real estate bubble, creating more bankruptcies and defaults on loans.
But many economists say the low interest rate policy may trigger bigger bubble in household lending and real estate prices, sparking worries over a massive number of household bankruptcies, which could lead to huge bad loans of commercial banks and credit card firms. Household debt now accounts for half of domestic bank loan portfolios, up from one-third before the 1997-98 financial crisis.
Household borrowing has been rapidly growing in recent months, leaving households increasingly exposed to credit risks. Monthly household debts rose 6.1 trillion won ($4.9 billion) in September. BOK's Park predicted household debt would continue to rise thanks to low interest rates.
The finance ministry warns that total household debt is expected to reach 81 percent of the country's gross domestic product that totals 545 trillion won ($438 billion). The total household debt was equivalent to 64.8 percent of gross domestic product in 2001, up from 56.2 percent in 2000, and compared with 50.5 percent in 1999, according to the central bank.
In a looming sign of the bursting of a credit bubble, the overdue payment rate on credit card bills has been sharply rising, fanning fears of a credit crisis and the possible insolvency of domestic banks.
Market experts blame low interest rates for fueling an explosion of household debt. The BOK's Thursday decision would help increase household debt, they said.
They say a rise in individual loans is a good sign in a growing economy, but the current increase is being driven by false demand triggered by a low interest rate and inflated asset prices.
"A possible plunge of asset prices and private consumption could lead Korea to similar economic troubles to those Japan suffered from the late 1980s," said Cho Ha-hyun, an economics professor at Yonsei University.
Consumer spending has served as a key driver of growth in the South Korean economy, as the government's policies to stimulate domestic consumption which has effectively cushioned the blow of tumbling exports. The government has taken a series of consumption-boosting measures, such as tax deductions for credit-card users and a tax cut on cars.
Led by increased private consumption, South Korea's economy, which contracted 5.7 percent in 1998 in the wake of the Asian financial crisis in 1997-1998, has made a remarkable recovery with growth rates of 10.9 percent in 1999 and 8.8 percent in 2000. The economy lost steam last year with a 3.0 percent growth rate as its exports were affected by a global downturn.
But domestic consumption has been rapidly cooling down as stock prices are plunging and real estate market prices are stabilizing, according to the government's compiled data.
The country's export growth has also run out of steam mainly due to uncertainties in the United States, South Korea's biggest trading partner.
South Korea's year-on-year growth in exports slowed in September to 12.6 percent from 18.9 percent in August. Still worse, September's double-digit growth was largely a technical rebound from a 20 percent fall recorded during the same period last year.
"Worries over exports and domestic consumption combined to hurt the country's economic growth," said Chung Moon-gon, an executive at the private Samsung Economic Research Institute.
