Korea's Winter of Discontent
By John Larkin/SEOUL
Far East Economic Review
Issue cover-dated December 7, 2000Pressure is rising on President Kim to push indebted companies to the wall. Strong unions threaten more unrest if jobs are cut, but foreign investors are losing patience
IT'S AN UNSEASONABLY sharp mid-November day in Seoul and there's extra bite in the air at Hanyang Construction's headquarters. The builder has just been earmarked for insolvency by the government. More than 1,000 jobs will vanish, but not without a fight. Three hundred unionized workers brave the rain to protest against the closure. Their red-and-white bandannas are emblazoned with the slogan "fight for survival," and that's exactly what they intend to do. Never mind that Hanyang has been in court receivership for seven years. The workers insist it's making money and don't like their chances of finding new jobs in the depressed industry. "The government is betraying us," fumes Kim Woo Chol, a 28-year-old technician. "I'll fight until someone guarantees my livelihood."
Foreign investors won't shed any tears. They're losing patience with Korea's failure to drastically reform its still-bloated economy. Companies like Hanyang have been propped up for years, loading the financial industry with debt that could fester into a bankruptcy crisis if the economy slows as predicted next year. South Koreans, too, wonder whether President Kim Dae Jung's government can handle the situation. They have led an exodus from equities that has pushed the stockmarket down nearly 50% this year.
Corporate closures are the missing link in South Korea's overhaul after the 1997 foreign-exchange crisis, part of the wider Asian contagion. That failure of will is igniting fears of a second bankruptcy crisis, this time damaging local banks, not foreign ones. Korea rebounded quickly from the 1997 meltdown but may have basked in the glory too long without paying the price. A repeat of the last crisis is unlikely even if painful reforms are sidestepped. But South Korea may be facing the slow death of its huge potential. "It's crunch time now," says Kim Chul Jung, a strategist at Jardine Fleming Securities. "The market wants to see real liquidation, otherwise we could face 'Japanization' of the economy--a 10-year recession with no significant recovery in sight."
The government is trapped. On one hand it would like to please foreign investors by killing off dud companies. But Korea's powerful unions could make the resulting job losses politically unpalatable before the next presidential election in two years' time. Large job cuts would hammer consumer confidence, thereby eroding growth. Labour disputes are on the rise, and unions have threatened nationwide strikes in December to protest against lay-offs at private and public companies. "We don't want key industries going to foreigners and we won't accept job losses," declares Kim Tae Hyun, head of policy planning at the Korean Confederation of Trade Unions.
Pleasing foreign investors should be the top priority. They hold almost 30% of the stockmarket. Failure to restructure Korean companies could convince foreigners to redeem equity investments, especially if a falling U.S. market softens them up. With economic growth tipped to fall from about 9% this year to as low as 4% next year, many companies won't be able to cope. Pressures could ruin much of the good work done to streamline the economy since 1997. And that could interrupt other important policies, including South Korea's détente with North Korea. "It's kind of scary," says Del Ricks, a technology analyst at W.I. Carr Indosuez Securities. "We can have another crisis if the issues aren't addressed."
Clearly it's time for some political leadership, but that's scarce. The ruling Millennium Democratic Party and the opposition Grand National Party have been embroiled in brawls that have suspended sittings of the National Assembly for much of the year. Partisanship reached farce on November 17, when MDP lawmakers locked the speaker, Lee Man Sup, in his office to prevent him presiding over a vote to impeach the prosecutor-general.
It would be funny if it wasn't so serious. Though officials say the parties have since resolved their differences, the high jinks add to a sense that the government has taken its eye off the ball. The impasse delayed passage of 40 trillion won ($34 billion) in public funds to recapitalize banks. The MDP's bona fides as a mediator between conflicting interests like unions and employers were damaged. It may be harder next time to convince the public to tighten its belts. "The most worrisome thing is whether this is a symptom of Kim Dae Jung becoming a lame duck," says a Western diplomat. President Kim has two years left to serve and hasn't anointed a successor for the polls.
The parliamentary schism has increased public distrust of officialdom. It was already high after a string of political scandals culminating in the resignation of Culture and Tourism Minister Park Jie Won in September. He was accused of arranging huge bank loans for friends but was later cleared. In October came allegations that the president of Internet company Korea Digital Line offered bribes to financial regulators. Says Professor Lee Jung Hoon of Yonsei University: "We may be entering a second crisis, but the seriousness of the situation hasn't sunk in yet. The leadership places politics above every other issue, even the economy."
The perception that Seoul prefers stopgap policies to real reform has bred uncertainty, hurting the stockmarket despite low unemployment, low inflation and robust foreign reserves. Foreigners are still in, but for how long? "I've been on the road recently and I've never seen such bad foreign-investor sentiment toward Korea," says Keith Nam, head of research at ABN Amro Asia's Seoul office.
Though debt-servicing costs have fallen, corporate debt remains sky high. The banks' response has been to wind back credit, thus squeezing liquidity. An economic slowdown next year could pull the plug on struggling companies also facing payouts on maturing corporate bonds. Samsung Securities estimates that 30% of listed nonfinancial companies don't earn enough profit, even in a healthy economy, to cover interest payments. Net profits of the top five companies were 79% of total corporate profits in the third quarter. That means the big guns make enough to cover interest and shed debt, but that many second- and third-tier companies are as highly leveraged as ever.
The International Monetary Fund, which brokered the rescue of Korea's economy in 1997, is showing signs of nerves. Though lauding progress on other fronts, it highlighted in a recent report the corporate sector's stubbornly high debt levels and the high number of companies that should have been wound up years ago. "The need for further concrete restructuring progress and tangible results--principally the exit of nonviable firms and asset sales--has now become imperative to ensure that the remaining problems do not jeopardize what has already been achieved," said Ajai Chopra of the IMF's Asia and Pacific Department in the report.
Jin Nyum, the minister of finance and economy, admits that retooling companies and the financial industry has been slow (see interview on page 20). But he insists the government is committed to introducing more market reforms. He says it's time for commercial banks, flush with deposits from investors seeking safe havens, to start closing down companies. "We are not going to write off all the nonperforming loans from banks," Jin says. "They should take responsibility."
But banks are more preoccupied with keeping their books in good shape, the best way to avoid being merged with a rival. They can't take all the blame though, as most of the indebted banks are controlled by the government. The unwillingness of banks to take big losses on problem loans foiled the sale of Daewoo Motor. Ford quit talks in October, leaving the car maker unsold despite two attempts in the 15 months since its mother group's collapse.
Hyundai's recent troubles have also raised doubts about the government's determination to clean house. The near-insolvency of Hyundai Engineering & Construction initially drew a tough response from regulators who saw a chance to eject the powerful Chung family from management. Then they changed tack. According to local press reports, Financial Supervisory Commission Chairman Lee Keun Young met Hyundai Motor Chairman Chung Mong Koo to urge him to help Hyundai Engineering, run by his younger brother Mong Hun. This was despite the car maker's separation from the group in August. Hyundai Motor's shares dropped 7.2% the next day. Finance Minister Jin denies the government broke the spirit of its own rules against deals between affiliates that are contrary to shareholder interests.
Banks' reluctance to take a haircut on reckless pre-1997 lending has allowed "zombie" companies, like those under workout plans or in court receivership, to exploit debt forgiveness to dump products on the market at cheap prices. That has sent healthier rivals close to insolvency. "The most urgent order of business is to give the banks incentive to write off most of their nonperforming loans," says Jardine Fleming's Kim Chul Jung. Kim believes NPLs could reach 190 trillion won--far higher than the government's estimate--and worries banks have not set aside enough to take the loss. If they haven't, wholesale liquidations shouldn't be expected soon.
But liquidations and the writing down of debt rather than mere rescheduling are what's needed to restore confidence. There are encouraging signs. Tough new laws to encourage nonjudicial bankruptcy await parliamentary approval. The government's decision to force the closure of several indebted construction firms, like Hanyang, won praise. Unions have agreed to lay-offs at Daewoo Motor, a sign they might not yet have the public support for a full-blown campaign of unrest.
Some struggling workers are prepared to give the government more time, but not much. Chong Man Son has seen profits drop by 60% this year at his roller-door spring factory. "I have to go on, so I'll wait a little for things to improve," he says. Seoul will hope the rest of the world is as patient.