If our world has any place that acts like a financial early warning system, it's South Korea. With high short-term debt and little to cushion it from destabilising events, South Korea is often the first of the top 15 economies to zig, zag or hit an economic wall. At the moment, events suggest that Asia is fast running into trouble.
South Korea was probably hit harder by Standard & Poor's cut of the US's AAA credit rating than the US. Markets plunged, capital fled and credit-default swaps protecting public debt soared as US treasuries rallied.
Yet for many observers, it's not just financial turmoil they fear. Nor is it the threat a worldwide slowdown poses to South Korea's fundamentals, which are comparatively sound.
What adds an unpredictable ingredient to the mix are South Korea's hyperactive regulators. A case in point was South Korea's decision to join Greece in clamping down on short-selling of stocks. Every nation wants to reduce market volatility that might disrupt the economy. In South Korea's case, regulatory meddling unnerves investors as much as a shaky dollar, excessive debt in Europe or signs China is overheating.
Nothing tells the story like the saga of Woori Finance Holdings, the country's largest financial firm. Last week, South Korea again was unable to sell its share of the firm, parts of which have been under government ownership since 1999. Regulators dulled its appeal by inflicting the company with revolving-door chief executive syndrome. Until recently, it had a new one every couple of years.
The dire state of markets scared away some bidders. It complicates President Lee Myung-bak's pledge to accelerate privatisation efforts. Normally, a $4.8 billion offering like the one planned for Woori would entice investors seeking a capital base in an economy whose potential outshines most developing nations.
Yet foreign bidders are also well aware of the terms that come with any deal on South Korean soil.
Critics look no further than Lone Star Funds, a US private equity fund. For more than five years, regulators have stymied Lone Star's efforts to sell a stake it grabbed in Korea Exchange Bank in 2003 amid the fallout from the Asian crisis several years earlier.
A brouhaha at Standard Chartered also worries investors. Its staff has been striking for more than 50 days in the longest work stoppage in South Korean banking history. The reason? Opposition to a proposed incentive-based pay system that would reward talent rather than seniority.
Investors want clarity. They're looking for definitive answers that suggest where South Korea's financial sector is heading. Regulatory ambiguity helps explain why no foreign suitors stepped up to bid on Woori.
The recent plunge in South Korean markets may be a passing phenomenon. The reason capital flees from South Korea so quickly is really a testament to its open markets.
Investors who need cash to meet margin calls can sell South Korean assets easily. What's sometimes forgotten is that South Korea is among the first to recover when things calm down.
Fear of capital flight has caused all kinds of machinations in Seoul that confuse investors. Every few days, it seems, brings new directives on capital controls, taxation of bonds, stock trades, mergers among savings banks, the role of domestic brokerages, companies buying foreign-currency bonds, financial holding companies bidding for rivals or how many currency derivatives banks can hold.
South Korea has lots going for it. It's growing 3.4 per cent a year, and with short-term interest rates at 3.25 per cent, the Bank of Korea has latitude to pump liquidity into panicky markets. Yet it is missing an opportunity.
As Asian markets see-saw, investors wonder if a repeat of 2008 is afoot. The difference between then and now, of course, is that the euro wasn't crashing, S&P wasn't downgrading the biggest economy and governments had more fiscal ammunition. The next crisis would be one with fewer shock absorbers.
The modern-day gold rush - the metal hit a record $US1891.90 an ounce this week - speaks to the loss of confidence in paper assets. In South Korea, households are buzzing about an even more basic metric of confidence - suicide.
Asia's crash 14 years ago saw a shocking rise in the number of investors taking their lives, shamed and depressed by the losses they suffered. South Korean media spent the past weekend detailing a fresh wave of investors killing themselves amid huge market reverses.
Let's hope South Korea is able to defy its legacy as a global bellwether, if only for the sake of those who might succumb to personal despair.
Frequently Asked Questions about this Article…
Why is South Korea often seen as a financial early warning system for investors?
South Korea is considered a financial early warning system because it’s one of the top 15 economies that often reacts first to global economic shocks. With high short-term debt and minimal cushioning from destabilizing events, South Korea’s market movements can signal trouble ahead for Asia and global investors.
How does regulatory intervention in South Korea affect everyday investors?
South Korea’s aggressive regulatory meddling, like clamping down on short-selling, tends to unnerve investors by increasing market uncertainty. These moves can scare investors off, complicate investment decisions, and cause volatility, making it tougher for everyday investors to predict market directions.
What happened with Woori Finance Holdings that worries investors?
Woori Finance Holdings, South Korea’s largest financial firm, faced issues due to government ownership and rapid CEO turnovers, which damaged its market appeal. The government's inability to sell its stake amid regulatory obstacles has made investors cautious, highlighting challenges in the country’s privatization efforts.
Why are foreign investors hesitant to buy stakes in South Korean companies?
Foreign investors are wary because South Korea’s regulatory environment often creates ambiguity and delays. Cases like Lone Star Funds’ struggled attempts to sell their stake in Korea Exchange Bank show how regulations can stymie deals, causing uncertainty and hesitation among international buyers.
What role do strikes and labor disputes in South Korean banks play for investors?
Long-lasting strikes, like the 50-day work stoppage at Standard Chartered Bank over incentive-based pay, signal internal turmoil and resistance to change. Such disruptions can impact bank performance and investor confidence, raising concerns about stability in the financial sector.
How does South Korea’s open market affect capital flow during financial stress?
South Korea’s open financial markets allow capital to flow out quickly during panic, as investors can easily sell assets to meet margin calls. While this liquidity is a sign of openness, it can also accelerate capital flight during times of uncertainty, adding to market volatility.
What challenges do frequent regulatory changes in South Korea create for investors?
Frequent shifts in policies on capital controls, bond taxation, stock trades, and other financial regulations make it hard for investors to plan ahead. This ever-changing landscape breeds uncertainty and can discourage both domestic and foreign investment.
Given the current economic climate, should investors be worried about a repeat of the 2008 crisis triggered by South Korea’s markets?
While markets are shaky and reminiscent of past crises, today’s situation in South Korea differs: the euro isn’t crashing, there’s no major downgrade of the biggest economy like in 2008, and governments have more fiscal tools available. Still, investors should monitor South Korea closely due to its vulnerability and regulatory uncertainties.
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