Korean stock market crash reminiscent of Asian Financial Crisis? Analysis firm says current financial risks in South Korea show structural similarities to 1996 AFC

Odaily Planet Daily reported that regarding the recent sharp decline in the South Korean stock market, the domestic independent global macro research firm Tantao Macro previously stated that the current financial risks in South Korea show structural similarities to those before the 1996 Asian Financial Crisis (AFC): semiconductor exports account for 41% (16% in 1996), foreign ownership of stocks has hit a historic peak of 40%, and external debt/GDP has risen to 39.6%. However, key differences lie in: 1) the reserve adequacy ratio (ARA) reaching 92% (only 54% before the AFC), the proportion of short-term external debt falling to 9.4% (11.5% before the AFC); 2) a free-floating exchange rate replacing a soft peg, reducing the risk of a run on the currency; 3) corporate leverage growth slowing down, with the bank non-performing loan ratio lower than during the AFC period.

Currently, risks are mainly concentrated in the stock market: the KOSPI's price-to-book ratio of 2 times and price-to-earnings ratio of 30 times are both at record highs, and the balance of margin loans has doubled to 38.6 trillion won in 1.5 years. The financial stability index indicates an overall risk at the historical 62nd percentile (yellow light zone), with the valuation dimension reaching the 91st percentile.

Model calculations show that South Korea has a 5% probability of falling into negative growth over the next year, but the risk of a vicious cycle is significantly lower than during the AFC, mainly due to a stronger foreign reserve buffer and increased exchange rate flexibility. Recessions of this magnitude have only occurred three times in the past three decades. Key warning: If the semiconductor cycle reverses or the Federal Reserve's tightening triggers foreign capital outflows, the stock market could become a hub for risk transmission.