Troubled South Korea not anywhere near crisis

By Yoo Choonsik - Analysis

SEOUL (Reuters) - South Korea's president warns the economy risks tipping into crisis from surging prices and slowing growth but analysts say it isn't anywhere near as gloomy.

Asia's fourth-largest economy is being confronted by its toughest challenge since the 1997 Asian financial meltdown, but relatively healthy business and macroeconomic fundamentals suggest it is not close to a crisis, they said.

President Lee Myung-bak, who has seen his approval rating plummet to under 20 percent from more than 50 percent after barely three months in office, warned on Tuesday the country faced a "resource crisis". He described it as the gravest threat to the economy since the 1997 financial debacle.

South Korea relies heavily on imports of most energy, food and raw materials supplies, making it especially vulnerable to skyrocketing oil and commodities prices.

Analysts said Lee was right to draw attention to the threat from inflation, but may be overstating the dangers.

"I think he's trying to rally support for his beleaguered government by pointing out an external threat to the economy. I also think he is overstating the threat," said Tim Condon, Singapore-based Asia economist at investment bank ING.

South Korea's current account is in deficit, external debt rising and the won weakening, but these won't drive the $1 trillion economy into a full-fledged crisis, analysts said.

The corporate and financial sectors, furthermore, are stronger than they were a decade ago.

"The macroeconomic imbalances are nowhere near as large as they were in the run-up to the Asian financial crisis," said Frederic Neumann, Hong Kong-based Asia economist at HSBC. "Now, foreign exchange reserves are ample, external debt (is) nowhere near as high, and the currency appears fairly valued."

The won's freefall after years of current account deficits run up during greedy expansion by companies had put South Korea on the verge of a sovereign default in late 1997, only to be rescued by an International Monetary Fund-led bailout.

"The overleveraged corporate sector, a key vulnerability behind the Asian crisis, has deleveraged significantly," said Meral Karasulu, the IMF's representative in Seoul.

"The financial sector, which lacked commercial orientation and ability to assess risks has been transformed into a vibrant one, with high levels of capitalization and low levels of non-performing assets," she said.

TOUGH CHALLENGES

President Lee, who won by a landslide in December after a campaign focused on jump-starting growth, is looking to defuse public anger over a resumption of U.S. beef imports and dissatisfaction with his governing style.

South Korea expects to post its first current account deficit since the 1997 crisis this year. Short-term external debt as a ratio of foreign reserves has doubled in three years and consumer price inflation is running at a 7-year high.