Currency turmoil prompts review of IMF forecasts for South Korea

The International Monetary Fund (IMF) yesterday warned it would have to review its economic forecasts for crisis-ridden South Korea in the light of the won's steep fall. Meanwhile, as Reuters reports from Seoul, the incoming president has voiced his opposition to a package of reforms aimed at speeding up the IMF plan.

In an assessment on 3 December, the IMF predicted South Korea would see economic growth of about 2.5 per cent next year and record a current account deficit of $2.3bn (pounds 1.4bn).

But IMF Asia-Pacific mission chief, Herbert Neiss, said yesterday: "When we forecast in early December that the current account deficit would shrink ... the won had not depreciated as much as it has now. So we have a new situation, we will have to review our forecasts."

At the time, the won was trading at around 1,196 to the dollar. But as fears of a debt moratorium mounted, the won slid further. On Friday it hit 1,498 to the dollar, after dipping to a record 1,950 during the week.

Asked when the South Korean economy would fully recover, Mr Neiss said: "A lot depends on market psychology and on the confidence that foreign investors and the Korean people have in the strength of the economic programme."

Mr Neiss said South Korea's soaring interest rates were needed to stabilise the foreign exchange market.

"In the long run, interest rates must come down to permit the economy to recover. But in the really short term, when the markets are in turmoil and in chaos and speculation is rampant and the exchange rate plummets, there is no choice but to have a very high interest rate in order to discourage these developments and restore order in the exchange market," he said.

He said the IMF would help discussions between the South Korean government and foreign financial institutions.

South Korea's National Assembly is expected to pass 13 financial reform bills today, which had been shelved afterprotests from the central Bank of Korea (BOK) and workers in financial institutions.

But the passage of the bills seemed to face obstacles as president-elect Kim Dae-jung yesterday voiced concern over the legislation, which would give the finance ministry authority over a new unified supervisory body. The central bank also repeated its dissent over the bills.

South Korea has agreed to pass them by the end of this year to speed up restructuring of the financial sector in exchange for the $60bn bail- out package arranged by the IMF earlier this month.

But the Bank of Korea, whose 3,500 employees vowed to quit in November if the bills passed in their current form, repeated its objections.

The bills propose the integration of three financial supervisory bodies in the banking, securities and insurance sectors, while giving full authority to the central BOK to plan and implement monetary policy.

They failed to go through in November due to disagreements over the role of the central bank and who would supervise the watchdog. The current draft gives the Finance Ministry authority over the watchdog body. The BOK would be stripped of its supervisory power over the banking sector, a bone of contention between the Finance Ministry and the central bank.

Kim Dae-jung stressed that the supervisory body must maintain its independence and neutrality, according to a statement by the party.

Meanwhile, the Chinese central bank governor warned yesterday that China was facing "a serious threat from financial risk" though it was in no immediate danger of being caught in the Asian economic crisis.

In a speech highlighting the problem of non-performing bank loans, Dai Xianglong conceded that state-run commercial banks had lost control of their branches in certain areas.