THERE may be light at the end of South Korea's dark tunnel of economic difficulties, but the manager of Schroder Investment Management's GBP66 million (about HK$832 million) Seoul Fund sees no sign of it yet. 'We're probably going through the worst period at the moment,' Richard Firth, who is based in London, said during a visit to the territory last week. 'Outside influences may start to have a beneficial impact as we move through 1997 - I have to say, though, that we were expecting this to happen for most of 1996 as well.' South Korea's economy is reeling from a one-two punch: a cyclical downturn prolonged and exaggerated by structural problems that have exploded in the worst bribery scandal to hit the country in a decade. The business cycle started to sour in the second half of 1995, when demand slackened for the country's primary exports of cars, petrochemicals and steel, and oversupply hit its exports of semiconductors. At the same time, South Korean industrialists made heavy investments in new capacity, boosting imports of heavy machinery. 'They've always been very aggressive investors,' Mr Firth said. This pincer-like combination pushed the current account deep into the red, nearly trebling the deficit last year to US$23.7 billion. It continues to grow, increasing by 82 per cent in January to US$3.1 billion. That set off a domino effect, limiting the supply of US dollars and causing South Korea's currency to depreciate. The won is at a 12-year low against the dollar, losing 8 per cent last year and another 6 per cent so far this year. The currency's fall has hurt corporate earnings by inflating the value of companies' dollar-denominated debt and increasing their import costs. Mr Firth said profits of Seoul-listed companies dropped by more than 70 per cent last year and could drop by as much as another 20 per cent this year. Making an already-bad situation worse, tight liquidity has pushed interest rates to an 18-month high, with the rate on won-denominated three-year corporate bonds hitting 13 per cent last Tuesday. This has particularly disastrous consequences for South Korea's heavily geared conglomerates. With interest rates so high, investors have no incentive to put their money into stocks. As a result, the benchmark Korea Composite Stock Price Index has tumbled 40 per cent from its October 1995 peak. So much for the cyclical difficulties. The country has substantial structural problems, too. These have been unmasked in spectacular fashion by the massive loans-for-kickbacks scandal surrounding Hanbo Steel's collapse in January under the weight of US$5.8 billion in largely unsecured loans. State prosecutors are investigating rumours that President Kim Young-sam's second son, Hyun-chul, received more than 200 billion won (about HK$1.72 billion) in kickbacks. Three bankers are on trial in the bribery scandal, as are seven other people - including a former Cabinet minister, Hanbo founder Chung Tae-soo and his chief accountant, three close aides to President Kim and an opposition lawmaker. Mr Firth said this was symptomatic of governmental interference in the banking sector, a practice that took deep root during decades of rebuilding after the Korean War. 'The financial system is very, very weak because the banking system was set up to provide cheap finance for particular industries,' he said. 'But it's meant that banks haven't always been in control of their lending decisions.' Even now, the government was a large shareholder in some of the strongest banks and might force them to merge with weak banks.