Seoul talks test Asia's standing with the IMF
The first big test of how Asia stands with the International Monetary Fund is upon us this week. A 12-member IMF team is in Seoul, pushing the South Korean Government to make an agreed repayment by December of US$2.75 billion.
The Koreans want to roll it over for another year, arguing that the terms of the $60 billion bailout organised last December allow them to do so. Ordinarily one might expect the IMF to agree but it is running a bit cash strapped these days and needs the money.
The Korean strategy for use of the money is becoming clear. It is to buy time. Korea had to run to the IMF for help last year when it turned out that foreign currency borrowings were much higher than thought and the collapse of the won induced lenders to demand their money back.
The game plan is now to stimulate the economy with low interest rates, not quite the normal IMF prescription, then push the current account so hugely into surplus that the more demanding lenders can be repaid and the rest convinced that they can safely leave their money in Korea.
The first phase has been implemented. The South Korean Government, for all its talk of allowing the free market a greater role, can still lean heavily on its banking system and interest rates have been driven to record lows.
But there is not yet much sign of it having stimulated the economy. Industrial production is plummeting, retail sales have collapsed and the second quarter showed the economy contracting by almost 7 per cent.
Strangely, however, the current account does show the huge surplus expected of it. This amounted in the first six months this year to the equivalent of 17 per cent of gross domestic product although the trend more recently is down again.
It was not the result of a stimulated economy exporting more. The latest figures show exports in US dollar terms falling by 6 per cent on a six month average basis. It was rather that imports have fallen by a startling 38 per cent on the same basis and therein lies a story.
Korean factories normally run big inventories but have recently been winding these down precipitously. Over the last six months de-stocking has amounted to the equivalent of more than 13 per cent of GDP. Imports are down because the warehouse floors are being scraped to find substitutes at home.
Assume for a moment that it had not happened and these goods were still being imported. The current account surplus in that case would not amount at present to much more than 2 per cent of GDP. It's a worthwhile assumption to make because inventories are limited. When they are gone imports will have to rise again.
Korea still desperately needs to buy time for its economy to recover and, although its balance of payments figures make it seem that it now has the money to repay, this will not long remain the case. Repaying the IMF now will make it difficult to keep interest rates down in a few months time.
These talks in Seoul will bear close watching. They will set a precedent for IMF policies in the rest of Asia.