Will the Korean stock market plunge replay the Asian Financial Crisis? Analysts say that South Korea’s current financial risks are structurally similar to those of the 1996 Asian Financial Crisis

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ME News: On July 13 (UTC+8), amid recent sharp declines in the South Korean stock market, China’s independent global macro research institute, Tan Tu Macro, said in a prior post that South Korea’s current financial risks show structural similarities to the period before the 1996 Asian Financial Crisis (AFC): the share of semiconductor exports is 41% (16% in 1996), foreign holdings in stocks have reached a record historical peak of 40%, and external debt/GDP has risen to 39.6%. However, the key differences are: 1) the adequacy ratio of foreign reserves (ARA) is 92% (only 54% before the AFC), the share of short-term external debt has fallen to 9.4% (11.5% before the AFC); 2) a freely floating exchange rate has replaced a soft peg, weakening the risk of a run; 3) the growth rate of corporate leverage has slowed, and the banking NPL ratio is below the AFC-era level. At present, risks mainly concentrate in the stock market: KOSPI price-to-book at 2x and price-to-earnings at 30x are both at record highs, and financing outstanding has doubled in a year and a half to 38.6 trillion won. Financial stability indicators show overall risk at the 62nd percentile historically (in the yellow-light range), while the valuation dimension is at the 91st percentile. Model estimates indicate a 5% probability that South Korea will fall into negative growth over the next year, but the risk of a vicious cycle is significantly lower than during the AFC. The main reasons are stronger foreign-reserve buffers and improved exchange-rate resilience; in the past 30 years, recessions of this magnitude have occurred only three times. The core warning is: if the semiconductor cycle reverses or tightening by the Fed triggers foreign capital to withdraw, the stock market may become the hub for risk transmission. (Source: ODAILY)

Will the Korean stock market plunge replay the Asian Financial Crisis? Analysts say that South Korea’s current financial risks are structurally similar to those of the 1996 Asian Financial Crisis

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