The government is ''not prepared to reduce the economy to ashes'', as a senior official on our recent visit put it. This brings out wider points about the Korean economy and national identity that are not immediately apparent, but are very important for international investors to grasp in the context of restructuring. Our view is that Korea has the political commitment to substantially reform, but investors who expect to see the slate wiped clean and all residual issues finally addressed in 2001 can forget it. We think that the government will try and drive forward financial sector stabilization, and eventually restructuring, as a priority and leave corporate restructuring to the private sector. In addition to credit market intervention, fiscal and monetary policy measures will be used to try to avert a hard landing.
Monetary policy is hamstrung by the credit crunch.
Effectively, the banks have stopped lending as they try to repair their balance sheets. The Bank of Korea is providing plenty of liquidity to the system but this is not being translated into credit growth. The banks are just using it to buy government bonds or putting it back to the Bank of Korea as excess reserves. The problem is one of risk-aversion, not the price of money. Nevertheless, we think that the call rate will fall 100 basis points this year, even if such a move has limited practical effect in the short term.