Friday, May 30, 2008

S. Korea could become debtor nation by July: think tank

S. Korea could become debtor nation by July: think tank

SEOUL, May 30 (Yonhap) -- South Korea could become a net debtor nation by July if it does not turn a trade surplus and attract more foreign investment, a state-run think tank said Friday.

The Korea Institute for International Economic Policy (KIEP) based its predictions on the country's ballooning short-term debt, which hit US$158.7 billion as of late last year from $65.9 billion at the end of 2005. It said debt levels have been rising steadily coming into this year as well, and could jeopardize South Korea's current net creditor status in one or two months.

The KIEP said the rise in short-term debt is mainly due to insurance-motivated forward exchange demands, as exporters try to prevent losses caused by sudden foreign exchange fluctuations. Such hedging practices can minimize losses if the value of the Korean won falls against the U.S. dollar, but contribute to a rise in short-term debt.

It is imperative to attract more foreign direct investment (FDI) and fuel export growth to prevent the country from becoming a debtor in the next few months, the research institute said.

"Since there is no effective way to control the rise in short-term debt, the best course is to push for wide-ranging corporate deregulation so more FDI can arrive and help companies ship more products abroad," the report said.

It pointed out that while overall global economic conditions are not favorable at present, there are some bright spots, including the rise in FDI and solid export growth.

Inbound FDI totaled $2.7 billion won in the first quarter, up from just under $1.6 billion in the same three-month period in 2007.

Exports have also done well, reaching a record $38.02 billion in April for an annual gain of 27 percent. Despite export growth, the country's trade balance was in the red from December to April, and may suffer an annual deficit for the first time in a decade this year.

The deficit is due to this year's skyrocketing crude oil prices. Dubai crude, South Korea's benchmark that makes up the bulk of the country's oil imports, reached an average price of $99.21 per barrel this year, up from $68.43 in 2007.

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