Subprime Crisis
Clouds Korean Economy
Financial Crunch Affects Banks, Shipbuilders Global Stock Markets Tumbling Amid Uncertainties
Fears are growing that the global economy will face a serious setback should the simmering financial woes in the United States remain unchecked. Rising risks of a U.S. recession following the subprime mortgage turmoil has cast a dark cloud over the South Korean and global economies.
U.S. President George W. Bush announced a stimulus package featuring about $150 billion in tax rebates. The measure indicates that housing credit conditions are deteriorating in the U.S.
The Bank of Korea (BOK) predicted in a report that the U.S. will begin to recover from the subprime turbulence next year. The prediction took a more pessimistic tone than the central bank's December report predicting that the credit crisis might be under control by the second half of this year. The International Monetary Fund (IMF) also warned that potential losses from the subprime crisis may be higher than previously estimated.
Unfortunately, the U.S. financial market is reeling from the turmoil. Citigroup Inc., the largest bank in the U.S., reported $10 billion of losses in the fourth quarter of last year. It cut 4,200 jobs and turned to foreign investors for badly needed cash.
Merrill Lynch suffered a 2007 net loss of $7.8 billion due to the mortgage crunch, which forced the U.S. financial services giant to get $6.6 billion from South Korean, Kuwaiti and Japanese investors. It has already received $4.4 billion from Singapore's state-run Temasek Holdings.
The subprime debacle reminds South Koreans of the 1997-98 Asian financial crisis, which forced the country to go cap-in-hand for a rescue package from the IMF. The U.S. turmoil makes people uneasy about the economy, which could slow down amid the subprime's contagion effect. In particular, the U.S. is on the brink of a recession as the credit turmoil is spilling over into other sectors.
Besides, a U.S. recession is feared to cause a global economic downturn. South Korea, heavily dependent on exports, could be hit hard by the subprime fallout. The Seoul stock market tumbled this month as foreign investors dumped shares. Analysts expressed concerns that the U.S. credit turmoil might delay a recovery in domestic demand, while simultaneously decreasing shipments of Korean goods abroad.
It is discouraging news that the nation's trade account recorded a shortfall of $865 million last month, the first deficit in 57 months. The country also faces mounting inflationary pressure. Consumer prices jumped 3.6 percent in December from 3.5 percent in November, 3 percent in October and 2.3 percent in September. The increase was attributed to soaring prices for oil, raw materials and grains.
Against this backdrop, incoming President Lee Myung-bak and his government should concentrate on minimizing the effect of the subprime fallout on the economy. It is urgent to push for deregulation in order to create a more business-friendly environment and attract foreign investment. Lee, a self-proclaimed "President for the Economy,"faces the daunting task of reviving the economy.
The subprime crisis has begun to show its effects on the Korean economy with damage to domestic companies and banks, in particular. Banks"subsidiaries and branches in the U.S. suffered a sharp fall in net income last year, while they had to raise loan loss reserves, because of the subprime mortgage crisis, the Financial Supervisory Service said.
Seven branches and two subsidiaries of South Korean banks in the U.S. posted a combined net profit of $47.4 million in 2007, down 39.5 percent from $78 million a year earlier, according to the regulator's New York office. The outlets are tiny community banks dealing mostly with Koreans living in the U.S.
Their cumulative loan loss reserves surged 31 percent from a year ago to $12.2 million last year as default rates increased, the office said.
Woori Bank's outlets recorded the largest profit among all Korean lenders in the U.S. with $24 million, followed by Shinhan with $9 million, the Industrial Bank of Korea with $5.7 million and Hana Bank with $3.4 million.
Their combined assets totaled $7.9 billion as of the end of last year, up 30.2 percent from a year earlier.
Korean banks are expected to suffer more losses in their subprime-backed structured securities. The regulator said earlier that South Korean banks had not been as active as foreign financial firms in investing in subprime-related derivatives, so the impact of the crisis on Korean banks is limited.
The regulator estimates their subprime-related losses will reach 420 billion won ($442 million).
Korean banks have already seen billions of won in losses from CDOs, or collateralized debt obligations, which were issued by U.S. mortgage firms using subprime mortgage loans as collateral.
The subprime crisis has also begun to deal a blow to local shipbuilders who are increasingly worried about deepening global economic woes, mainly sparked by the U.S. financial crisis and tumbling financial markets in Europe.
Experts generally agree that local shipbuilders will maintain a brisk pace of business this year, given increasing orders of high-value ships and steadily rising oil prices.
However, growing concerns about global economic turmoil might affect investor sentiment negatively.
Such uncertainties have dragged down share prices of the world's three biggest shipbuilders.
Foreign investors sold some 350 billion won worth of shares in Hyundai Heavy Industries, the world's No. 1 shipyard, in January alone, while selling 266 billion won worth of stock in Daewoo Shipbuilding & Marine Engineering, the world's third-largest shipbuilder. They also dumped 76.5 billion won worth of shares in Samsung Heavy Industries in January, according to data from Woori Investment & Securities.
"As the South Korean players have already booked demand for the next four years, recent selling sprees by foreign investors are interpreted as concern about external uncertainties,"said Lee Jae-won, an analyst at Tong Yang Investment Bank.
According to industry data, prices of high-value bulk ships have fallen slightly and the demand for larger container ships and oil tankers has steadily been rising. Active exploration of oil deposits by major oil companies is pushing up demand for LNG carriers.
"Unless China and India show signs that their economies will continue to grow at a fast pace, concerns of a U.S recession will undermine shipbuilding shares,"said an analyst at a local brokerage.
South Korean shipbuilders had their best year ever in 2007 when they picked up 40 percent of global shipbuilding orders.
Economic experts called on the central bank to strengthen its monitoring of the financial market, cautioning about the growing external risks from the U.S. subprime crisis.
In a policy coordination meeting with Bank of Korea (BOK) Governor Lee Seong-tae, participants called for a thorough monitoring of financial firms, raising concerns about unrest in the global financial markets and an economic recession in the U.S.
"They advised the BOK to keep an eye on financial firms and take appropriate measures to help them overcome external uncertainties,"the BOK said in a statement released after the meeting. "They also called for more flexible monetary policies to curb inflation risks and to help the country maintain its growth momentum at the same time."The meeting came hours after the U.S. Federal Reserve cut its benchmark interest rate by .75 percentage point, the biggest one-day rate cut in 26 years. The BOK is expected to soon announce measures aimed at stabilizing the financial market.
Participants of the meeting included Hyundai Research Institute President Kim Joo-hyun, Korea Institute for International Economic Policy President Lee Kyung-tae, Korea Institute of Finance President Lee Dong-gull and Chang Ji-jong, vice chairman of the Korea Federation of Small and Medium Businesses.
"The financial market has become more sensitive to external variables,ΣΥ the statement said. "This raises the need for more effective and quicker countermeasures from policymakers."The growth of Korean individuals'investments in overseas properties has slowed at a faster pace in recent months in response to the sluggish housing market in the U.S., the biggest destination for overseas property investments by South Koreans, the BOK said Thursday.
Amid the deepening subprime crisis, purchases of overseas properties by individuals for investment purposes totaled $143 million in the fourth quarter of 2007, down from $260 million in the second quarter and $217 million in the third. The number of reported transactions peaked in September at 243, but fell to 155 in October, 114 in November and 78 in December, the bank said.
Property purchases by individuals for residential purposes also dipped to $48 million in the fourth quarter from $116 million in the second quarter and $80 million in the third quarter.
Korean Corporations'investments in overseas properties totaled $62 million in 2007, falling from $229 million a year earlier. The bank attributed the sharp fall to a decrease in the number of overseas development projects that were available to South Korean firms.
"The data shows South Koreans are increasingly cautious about investing in overseas properties, although the government has eased related rules,"a BOK official said.
Currently, Koreans can invest up to $3 million in overseas real estate. There is no ceiling if the acquisition is for residential purposes. The government is expected to scrap the cap on overseas property investment as early as this year in a bid to ease the won't strength against the dollar.
In 2007, South Korean individuals and firms purchased overseas real estate worth $1.22 billion, up 57 percent from $775 million in 2006.
By country, the U.S. was the largest investment venue at $328 million, followed by Malaysia at $79.4 million, Canada at $79 million and Singapore at $77.9 million.
South Koreans'investments in U.S. properties topped $109 million in the second quarter of 2007, but fell to $72 million in the third and $63 million in the fourth.
BOK officials said overall real estate investment abroad is losing steam due to the globally-weak property market, a side-effect of the U.S. subprime mortgage crisis.
However, large-scale investment in overseas real estate worth over $1 million surged. There were 353 investments worth more than $1 million by Korean individuals and corporations last year -- 13 percent of the total overseas property investment, according to the central bank.
"It looks like the subprime mortgage crisis has cooled South Koreans"appetite for overseas property investment,"said Kim Kwang-shik, an official at the BOK's International Bureau. "Despite government deregulation, people were reluctant to buy foreign real estate as the subprime problems have caused a significant drop in home prices in the U.S." nw
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