S. Korean banks struggle to raise dollars

By Song Jung-a in Seoul

Published: October 6 2008 07:15 | Last updated: October 6 2008 09:28

South Korea’s finance minister on Monday said that local banks were having difficulties securing foreign currency liquidity due to the global credit crunch.

Kang Man-soo, the finance minister, urged local banks to sell overseas assets to raise foreign currency funds and to boost lending to small and mid-sized enterprises struggling with rising borrowing costs.

The government last week said it would provide $5bn to local banks to help them boost lending to troubled SMEs and it would pump $10bn of foreign currency to the local won-dollar swap market to curb the local currency’s slide.

Mr Kang cautioned that South Korea may fail to achieve its 4.7 per cent growth target for this year as the global financial crisis spreads to the real economy.

”The global financial market turmoil has already started to affect our economy,” Mr Kang told lawmakers on Monday. ”And it is likely to take quite a while until the credit crunch eases in the emerging markets.”

Mr Kang added that South Korea had sufficient foreign exchange reserves to overcome any crisis. But concerns about the liquidity shortage at the banking sector pushed the won to the lowest level in six years and the benchmark stock index more than four per cent.

Last week, Moody’s Investors Service lowered the financial strength rating outlook for the country’s four major banks – Kookmin Bank, Woori Bank, Shinhan Bank and Hana Bank – from ”stable” to ”negative” as the banks find it increasingly difficult to raise funds in the global capital market amid soaring funding costs.

South Korean banks have been borrowing heavily in overseas markets to fund rapid growth in lending to companies and households in recent years, making themselves more vulnerable to the global credit crunch.

And their trouble is compounded by the won’s slide. The Korean won has become the world’s worst-performing major currency this year, falling 24 per cent against the dollar, hit by heavy foreign selling of Korean stocks and bonds.

The won’s continued weakness has prompted local companies and financial institutions to buy even more dollars, making the dollar shortage more severe.

But the chief executives of local banks yesterday tried to assure investors, saying that they do not see any big problem in dollar liquidity until the end of this year. And the government vowed to ”actively back up” foreign currency liquidity at struggling local banks by tapping its $240bn international reserves. But the stock market fell 4.3 per cent as investors remained jittery about the health of the banking sector.

The average credit risk of Korean banks is expected to remain high in the fourth quarter, as SMEs are likely to delay repaying their debt and households face greater debt burden amid slowing economic growth, a survey by the Bank of Korea showed.

”Although we are not expecting a banking crisis in Korea, the credit crunch is likely to be most severely felt in Korea among Asian economies, given the highly leveraged Korean corporate and households,” UBS said in a research note.
Copyright The Financial Times Limited 2008