Doubts over Korean reforms

 

The first full week of Mr Kim Dae-jung's transition to power in crisis-hit South Korea will start dramatically today with the freeing of two disgraced predecessors and a host of crucial financial reforms.

While the president-elect does not officially take the reins of power until February 25th, he will be increasingly influential in state affairs until then.

The government's most pressing priority in the week ahead will be to ensure ailing financial institutions are able to meet multibillion dollar debt obligations due at the yearend, in order to stave off a lingering spectre of sovereign debt default.

"Unfortunately, no one seems to clearly know whether South Korea can meet the obligations," said an analyst at ABN AMRO Hoare Govett Asia.

On Saturday Mr Kim held a crisis meeting with incumbent President Kim Young-sam at which they reiterated their intention to abide by the terms of a nearly £40 billion International Monetary Fund (IMF) bailout package.

Mr Kim Dae-jung alarmed financial markets by saying during his election campaign that he would renegotiate the strict terms of the agreement if elected, although he subsequently back-pedalled.

Five IMF officials, including Asia-Pacific director Mr Hubert Neiss, arrived in Seoul on Sunday and US Deputy Treasury Secretary Mr David Lipton is expected to follow today, according to domestic media.

They would meet officials at Seoul's finance ministry to express their views about the country's efforts to mend the financial system.

"Assessments by those visitors will be critical to further supplies of IMF-led loans," said Mr Kim Min-tae, analyst at LG Economic Research Institute.

At the same meeting, the two Kims horrified human rights groups by agreeing an amnesty for former presidents Mr Roh Tae-woo, Chun Doo Hwan and 23 of their associates jailed in connection with a corruption scandal, a 1979 coup and an army massacre a year later.

A Justice Ministry official said the two former presidents would be released this morning after a cabinet endorsement.

A presidential statement said the move, which should help ease right-wing mistrust of Mr Kim Dae-jung but which was immediately slammed by human rights groups, was being taken in the interests of national unity at a time of economic crisis.

Nevertheless, analysts said South Korea's financial markets would sag this week.

"The current economic malaise is too grave to be cured by a handful of reforms and a comic political ploy," said Mr Kim of LG.

The markets greeted Mr Kim Dae-jung's election win nervously on Friday and kept their eyes on the country's stark debt realities.

"Pressure on interest rates is mounting and the financial bottleneck is battering manufacturers as well as financial firms. The markets' future looks grimmer than ever," Mr Kim said.

The won briefly lost about 11 per cent of its value against the dollar early on Friday but ended at 1,550, still far lower than Wednesday's close of 1,481.0. Thursday was a holiday for the presidential election.

The composite stock index plunged 5.13 per cent on Friday on renewed concerns about hardships accompanying the IMF package. It recovered only 0.8 per cent to close at 400.19 points on Saturday.

Turbulence in other markets pushed benchmark yields on three-year corporates to their record highs - 26.14 per cent on Friday and 27.15 per cent on Saturday.