The financial chaos escalated over the weekend as three more of South Korea's publicly quoted companies were declared bankrupt, with another, Chun Kwang Industrial, the animal feed manufacturer, indicating that it too will be seeking court protection from its creditors. More than 15,000 Korean companies are reported to have failed this year.
South Korea's finance ministry admitted yesterday that it would have to increase a state fund established to buy bad loans to 20 trillion won ($12.4bn) from the current eight trillion won.
An official at the ministry's industrial finance division said: "We plan to speed up the process of cleaning up bad loans with the financial system as we promised the International Monetary Fund." Analysts estimate that the nation's bad loans figure has risen to over 35 trillion won.
Kim Dae-jung, South Korea's president-elect, faces an uphill struggle to rebuild confidence in the country's ailing economy. "Pressure on interest rates is mounting and the financial bottleneck is battering manufacturers as well as financial firms. The markets' future looks grimmer than ever," said one local economist.
Analysts are forecasting the situation in Thailand will deteriorate as the country becomes gripped by recession. The plunge in the Indonesian rupiah and a rapid rise in foreign debt levels is also likely to push more local companies into bankruptcy.
The IMF admits that it underestimated the severity of the Asian financial crisis. The repercussions of events in the Far East "have proven much deeper and more extensive than seemed likely only a few months ago," says the interim World Economic Outlook published yesterday by the IMF. It has reduced the fund's forecast for world economic growth next year to 3.5 per cent, 0.8 per cent lower than the forecast issued two months ago.
But the new report goes to some lengths to stress that most of this pain will be felt in Asia itself, provided governments adopt sensible policies in reaction to events. Saying that the rest of the world will "experience a dampening of foreign demand", the IMF has shaved just 0.2 per cent of its forecasts for US and UK growth, and less from its predictions for other European economies.
It even portrays the crisis as a welcome antidote to inflationary pressure in Britain and America. Among the advanced economies, it is other Asian countries like Hong Kong and also Australia and New Zealand that will suffer most.
The document says the impact on advanced economies outside Asia will most probably be "relatively moderate and temporary". Although it cautions that there remains a risk that the outlook will yet turn bleaker, it says: "The global growth rate projected for 1998 is even now slightly above the average experience of the past two decades," and "notably higher" than during the 1990-93 slowdown.
The report also predicts that - as long as the necessary reforms are introduced - the Asian economies will start to recover in 1999 thanks to their underlying strengths. It does concede a worst-case scenario, if the crisis persists and in the unlikely event that governments fail to cut interest rates in response to the downturn.
This would knock a further 1 per cent off growth in the industrial countries, taking it to 2.5 per cent in 1998 rather than the 3.5 per cent forecast in the new report.
Intended as a corrective to some of the more apocalyptic predictions about the impact of the crisis, the IMF's Economic Outlook expresses the greatest concern about Japan and Korea. Its forecast for Japan's GDP growth next year has been halved to just 1.1 per cent. The fund blames the Japanese government for introducing a much tougher budget policy during 1997, reversing tax cuts before the economic recovery had put down roots.
The prediction for Korea's growth in 1998 has also been slashed, from 6 per cent to 2.5 per cent. Many economists would, still see this is too optimistic.
The new IMF forecast
Country 1997 (est) % 1998 (new forecast) % Revision
World 4.1 3.5 -0.8
Advanced 3.0 2.5 -0.4
US 3.8 2.4 -0.2
Japan 1.0 1.1 -1.0
UK 3.5 2.4 -0.2
S.Korea 6.0 2.5 -3.5
Asian NICs 6.2 3.6 -2.4
Asean 4* 4.0 1.7 -3.7
* Thailand, Indonesia, Malaysia, Philippines
Source: IMF World Economic Outlook