Korea: Stocks suffer record fall on Wall Street meltdown--may impact fragile economic recoveryrecovery

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Three stories below from Korea on stock market woes

Korea: Stocks suffer record fall on Wall Street meltdown

The Korean stock markets crumbled yesterday, with the main index suffering its worst single-day decline on last week's Wall Street meltdown, analysts said.

The fall forced the Korea Stock Exchange (KSE) to halt trading on the main exchange for 20 minutes at 9:04 a.m. for the first time in its history due to the steep drop.

The Korea Composite Stock Price Index, or Kospi, plummeted a staggering 93.17 points, or 11.63 percent, to close at an 11-month low of 707.72, after falling briefly below the 700-point mark at one point.

When the smoke cleared, it had suffered the largest single-day fall both in terms of points and percentage.

Trading volume was fairly heavy at 285.3 million shares valued at 2.96 trillion ($2.66 billion).

Decliners overwhelmed gainers 837 to 45, while four stocks ended unchanged.

A record 266 issues fell by their daily 15-percent limit, while 17 shares went limit up.

The over-the-counter Kosdaq market also took a beating, tumbling 22.33 points, or 11.4 percent, to close the day at 173.54, the lowest since Jan. 27.

Trading was lackluster at 71.02 million shares worth 681.2 billion won.

"News of a record fall on the New York stock markets triggered a massive sell-off across the board," said an analyst at Daishin Securities Co.

Foreign investors and individual retail investors went on a crazy selling spree, offloading shares worth a net 156.1 billion won and a net 123.9 billion won, respectively.

In contrast, local institutional investors were net buyers of shares worth 238.8 billion won.

The top-four telecommunications shares - Korea Telecom, SK Telecom, Dacom and LG Information & Communication - bore the brunt of the market crash, all falling by their daily limits.

Korea Exchange Bank was the most heavily-traded stock, up 160 won on 21.03 million shares.


Finance minister urges institutional investors to maintain composure

Minister of Finance and Economy Lee Hun-jai yesterday urged institutional investors not to overreact to the stock market crash and behave with poise.

"Institutional investors should remain calm, act responsibly and keep a leadership role in the stock market," Lee said in a hurriedly-arranged meeting with reporters. "The status of the stock market has direct impact upon the state of the entire economy, not just security dealers, which may ultimately affect the nation's economical restructuring process."

The minister also added that institutional investors, in their pivotal role in the stock market perception, should act responsibly and instill a sense of reassurance to smaller investors, arguing that the market correction is only a temporary phenomenon.

Furthermore, minister Lee also urged the public to realize that fundamental differences exist when comparing the state of both the U.S. and Korean economies, thereby implying that stock market plunges in the U.S. need not reflect symmetrical effects in Korea.

Consequently, Lee cited the nation's low inflation rate and leveling industrial output as key macroeconomic indicators, and that the success of corporate restructuring measures indicated that the nation's economic health is not at risk.

"Inflation figures in April show that consumer prices declined 0.4 percent from last month, 0.3 percent from last year-end and 0.9 percent year-on-year."

However, Lee cautioned that the upcoming second quarter (April - June) will be a crucial determinant in the economy's outlook.

"Despite promising figures, macroeconomic figures for the second quarter will be pivotal in determining the direction of the nation's economy," said Lee.

The finance minister also offered assurances that foreign investors still considered Korean markets as undervalued, and that the possibility of massive external capital outflows is unlikely.

As a result, the minister stated that despite the unprecedented drops in the nation's equity markets, the government will not instigate any countermeasures to pump sagging share prices. He added that the government will not take an abrupt selling stance in its holding of local bank shares.

Furthermore, in light of healthy economic figures, Lee urged investors not to panic and await for further reactions from other international markets.

"Since the U.S. market's plunge, although the markets have dropped significantly, we need to wait and see how the shock will carry into worldwide exchanges, which will likely lose momentum by the time the London exchange closes," the minister said.

In response to the U.S. exchange nose-dive, the minister stated his opinions that it was triggered by high inflation figures sparking interest rate hike fears, thereby causing a negative market reaction, "In light of this being an election year, I am certain the government will maximize its efforts to soften the impacts of market drops and will make certain that Wall Street remain calm."

Furthermore, the minister also argued that the "Internet bubble" has already burst and that U.S. economic fundamentals remained strong.

However, although unlikely, the minister did not rule out the possibility of government intervention in the event that stock price indices of the U.S. Nasdaq and New York Stock Exchange fall under the psychologically significant 2,900 and 10,000 levels, respectively, which will likely result in further global panic.

"Government policy normally follows its flows, but needs to adjust accordingly when the situation warrants it, such as in the case of extraordinary events. Consequently, if the world exchange continues to plunge excessively, then appropriate measures will be implemented," said Lee.


Stock market crash feared to hamper financial, corporate reform efforts

A continued fall in stock prices is feared to deal a fatal blow to the nation's efforts to restructure its troubled financial and corporate sectors by making it hard for domestic companies to raise much-needed funds.

In addition, it could dampen a recent venture-industry boom which is emerging as a shot in the arm in the economy, prompt foreign investors to leave Korea and slow down economic growth by weakening private consumption, market watchers said.

"A persistent bearish stock market will come as a serious stumbling block to the nation's financial and industrial restructuring," an analyst said. "If restructuring efforts hit the rocks, Korea may run into a second foreign exchange crisis."

Among other things, a stock market meltdown is expected to make it almost impossible for domestic companies and financial institutions to raise money through rights offerings.

Difficulties in securing funds will in turn make it hard for large companies to lower their debt levels, while financially weak companies and financial firms should borrow money at a higher cost.

"Increased financing costs will worsen domestic companies' profitability, resulting in delaying efforts to streamline and reorganize their operations and thus slowing down the nation's economic reform," the analyst said.

There is also concern that the government may find it difficult to retrieve public funds put into weak banks and non-bank financial institutions since it will not be able to dispose of its stakes in them.

The government has so far injected about 64 trillion won into the overhaul of the domestic financial sector, while it plans to finance a second round of restructuring with the proceeds from the sale of its stakes in financial institutions.

The nation's venture industry, which has been a major force behind the economy's recovery since the 1997 foreign exchange crisis, is feared to be hit hard by a bearish stock market as well. Dampened investor sentiment would throw cold water on the over-the-counter Kosdaq market where most hi-tech, venture stocks are traded, throwing the venture industry into cash shortages, industry sources said.

They added that a slump in the domestic stock market is likely to weaken foreign investors' confidence in the Korean economy and thus sharply decrease the inflow of foreign equity funds, which has served as a lifeline for the Korean economy.

In addition, a sagging stock market could weaken private consumption, a strong engine for the nation's economic recovery, and slow down the pace of the nation's economic growth, they said. Prompted by strong consumer spending, the Korean economy grew a hectic 10.7 percent last year.

"A plunge in stock prices will lead to a decline in the value of investors' stock holdings, which will weaken consumer spending and decrease industrial output and corporate capital spending," an economist pointed out.

However, government officials played down such fears, saying that there is no reason for a further drop in domestic stock prices because Korea's economic fundamentals are different from those of the United States.

"Unlike the U.S. economy which has been booming for the past nine years, the Korean economy has just come out of a foreign exchange crisis and entered into a recovery phase," an official at the Ministry of Finance and Economy said. "The Korean economy has greater room for further growth, so domestic stocks will not fall sharply."

Given their huge profits last year, domestic companies are unlikely to face serious difficulties in meeting cash needs even if the stock market continues to be in a downward trend, he said, adding that a stock price fall will not decrease private consumption considerably.

Meeting with reporters, Minister of Finance and Economy Lee Hun-jai also said that stocks of large domestic companies are rather undervalued given big improvements in their profitability and financial soundness.

"In addition, domestic banks are expected to post big gains in their net profits this year because they put up sufficient reserves against losses from their loans to the Daewoo Group," the top economic policy maker said.


-- Carl Jenkins (Somewherepress@aol.com), April 17, 2000

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