July 1, 2009

East beats West in the Land of Morning Calm

Eric Ellis, Seoul

CROWDED, dynamic, bewildering Seoul — the thrusting capital of Australia's third-largest trading partner; the world's most technologically wired nation-city, boasting the world's fastest broadband; home to the world's best airport; and, thanks to its kimchi-loving commuters, the only mass transit system that permanently reeks of garlic.

After a week of interviews here, it's clear that South Koreans are feeling pretty pleased with themselves and not just because, like Australia and their northern neighbour with the twitchy nuclear finger, they've qualified for next year's World Cup.

No, remarkably for such an export-dependent economy — think Kias, LGs, Samsungs and Hyundais — South Korea has so far managed to dodge the recession from the now two-year-old global economic crisis that spread toxically from the West.

Despite exports slumping 18 per cent, South Korea posted economic growth of 0.1 per cent in the first quarter of this year. That's a close shave, it's true. But at least the economy grew and such are the tough times the world is enduring, it's almost akin to a boom. Gross domestic product growth, even marginally measured, is something Korea's fellow Asian export economies like Taiwan, Japan and Singapore can't boast.

The Government and the central Bank of Korea have warned that the economy will contract this year for the first time since 1998, but six months in, Koreans are holding on valiantly. Bars and restaurants seem full, outwardly and anecdotally. Seoul seems lively.

Indeed, there's very little of the concern among Koreans about the economy that one divines in stricken economies elsewhere. More concerning to 50 million South Koreans are the ICBMs lurking among the 24 million of their brainwashed cousins just 45 kilometres to Seoul's north. They point across the troubled peninsula towards Japan and Alaska and as far east as Hawaii in the mid-Pacific (which also means a North Korean nuke launched southward could lob somewhere around Brisbane).

South Koreans are sanguine about their economy because, compared with the catastrophe that engulfed them during the "Asian contagion" of the late 1990s, this crisis is a relative ripple. Much of South Korea was bankrupted in 1997-98.

By comparison with the present flat GDP figures, in each quarter of 1998 South Korea's economy contracted by an average of 6.65 per cent. The Korean won weakened 25 per cent against the US dollar last year; during 1997-98 it fell 60 per cent.

This crisis around, the "Land of Morning Calm" is reacting with, well, morning calm.

"We wake up and get the bad news from New York and London, but it's OK, we had our big crisis in 1998," explains HSBC bank's Changsoo Lee, "so we've been well prepared for this one."

So against this relatively buoyant backdrop, South Korean bankers still have their reputations intact and have begun launching financial products that remain years away from re-appearing in the West, if they ever surface again.

Among Western investors, mortgage-backed securities are now about as popular as Fred Nile chaperoning a Cronulla Sharks footy trip. It was the confidence collapse in these poisonous derivatives in the US in mid-2007 that sent the world careering into its financial pickle.

But in the first such bond launched in the region since the financial crisis, HSBC and Citibank have helped South Korea's biggest private bank, Kookmin, arrange a $US1 billion ($A1.2 billion) bond covered by its mortgage and credit card portfolio. That's a structure that would send chills through places like Parkes and Wingecarribee, among the scores of Australian municipalities that bought $2 billion of dodgy Lehman Brothers paper secured by dodgier American subprime mortgages.

But the Korean version is comprised of anything but the overleveraged "Deadbeat Dad" or "ghetto loans" packaged into the US nightmare. Kookmin's mortgages are solid Korean middle class; few Koreans owe their bank more than 50 per cent of the conservative value of their homes, a regulation instituted after the 1998 crisis.

More to the point, the five-year Kookmin facility was six times oversubscribed. About 55 per cent of it was taken up by Asian investors — further evidence, if any were needed besides China's huge continued flotation of the US economy, that the future indeed tilts eastwards.