Can Korea's 'High-Beta' Economy Withstand a Global Slowdown?

One reason Korea is better positioned to withstand a downturn now than at previous crisis points is that Korean banks have built up an arsenal of foreign exchange reserves since the global financial crisis of 2008 and have increased foreign exchange swap lines with China and Japan.

Higher foreign exchange reserves are good because they “help to mitigate short term liquidity pressures, potentially faced when repaying a large amount of external debt, for example,” says Man.

Korea’s short-term external debts have gone down, but they are still relatively high and could be considered an “Achilles' heel” for the economy, says Moody’s Byrne. That’s because lenders outside of Korea can make funding less available if they get nervous about economic risks.

It was Korea’s heavy reliance on short-term external debt in 1997 that helped trigger the Asian financial crisis, Byrne says. But, he adds, “since ‘97, the Korean banks have been managing this, and in recent years they’ve made progress.”

As a result Korea’s “external vulnerability ratio” — short-term debt coming due and the level of official foreign reserves, has fallen to about 64 percent from nearly 94 percent in 2009 and 290 percent in 1997.

“There’s definitely a vulnerability in a time of global financial market turmoil,” Byrne says. “But the vulnerability has been reduced in the case of Korea.”