(EDITORIAL from the Korea Herald on Sept. 20)

Market jitters
Korea has had some good news and some bad news. The good news was that it would be included in FTSE's category of "developed markets" in one year.

The bad news was a consensus among analysts that the weakened Korean stock markets would not
immediately benefit from the improved status. They agreed the Korean financial
markets would be in a shambles for as long as the U.S. financial crisis
continued.
Unquestionably, FTSE's decision Thursday to upgrade Korea to "developed market"
status next September was good news to portfolio investors in Korea and companies
listed on the Korean Stock Exchange. The news was all the more welcome, given
that the nation had long been on the global index provider's watch list -- since
2004 -- for a possible upgrade.
Moreover, FTSE's action will certainly have a positive influence on MSCI, another
leading global index compiler, when it reevaluates Korea next June. The Korean
government and the Korea Stock Exchange have strived in the past to boost its
standings in the FTSE and MSCI categories.
FTSE's upgrade was a vote of confidence in the Korean stock markets, Korea's
regulatory regime and the nation itself. This is made clear by the criteria FTSE
uses in evaluating countries in its indexes. The criteria include the economic
size, wealth, market quality, and market depth and breadth.
As a consequence of promotion from the "advanced emerging market" category to
"advanced market" status, foreign investors and funds benchmarked to the FTSE
indexes are certain to increase their investment in Korean stocks in the future.
Analysts are already busy estimating an increase in the inflow of capital. Such
an inflow will certainly boost Korean stocks, which are undervalued.
Price earnings ratios of Korean companies are unjustifiably lower than those of
their counterparts from the United States and other countries. The Korea discount
applies to all Korean companies -- big and small, good and bad -- despite Korea's
economic size (the 13th-largest in the world), its huge foreign exchange reserves
(the sixth-largest in the world) and its prowess in electronics, steelmaking,
shipbuilding and auto-making.
To the chagrin of investors in Korean stocks, however, few of the potential FTSE
benefits were forthcoming immediately. Instead, the benchmark KOSPI dropped 32.84
points, or 2.3 percent, on Thursday, as global concerns about the U.S. financial
markets were deepening in the wake of Lehman Brothers' file for bankruptcy
protection.
No recovery in the Korean stock markets is foreseen until after the U.S.
financial industry recovers stability. A protracted financial crisis in the
United States will pose a serious threat not only to the Korean stock markets but
to the entire Korean economy.
Voices of concern are being raised about a Korean version of the U.S. financial
crisis -- the collapse of the mortgage market leading to a financial meltdown.
The domestic housing market is sliding, as 250,000 new apartment houses remain
unsold in the nation. As a consequence, many homebuilders find it difficult to
pay back their loans in time.
Families having purchased homes do not fare any better. As of the end of June,
outstanding mortgages amounted to 229 trillion won, up 97 trillion won from the
end of 2002. Worse still, the cost of borrowing is on the rise.
Massive defaults by home buyers and homebuilders would usher in a U.S.-style
financial catastrophe. The Korean government will have to shore up the housing
market before falling home prices start to push the economy into recession. Its
market-boosting actions should include additional property-related tax cuts.
For their part, hard-pressed homebuilders will have to sell off assets and reduce
their payrolls if they wish to stay afloat. They will have to take self-help
measures before asking the government for market-boosting support and other types
of assistance.
(END)