Korean Stock Market Plunge Revives Asian Financial Crisis Fears? Analysis Firm Says South Korea's Current Financial Risks Structurally Similar to 1996 AFC

Odaily Planet Daily News In response to the recent sharp decline in the South Korean stock market, independent domestic global macro research firm Tantu Macro previously stated that South Korea's current financial risks show structural similarities to those before the 1997 Asian Financial Crisis (AFC): semiconductor exports account for 41% (16% in 1996), foreign holdings of domestic stocks have reached an all-time high of 40%, and the external debt-to-GDP ratio has risen to 39.6%. However, key differences exist: 1) The Reserve Adequacy Ratio (ARA) stands at 92% (only 54% before the AFC), and the proportion of short-term external debt has fallen to 9.4% (11.5% before the AFC); 2) A freely floating exchange rate has replaced the soft peg, reducing the risk of a run; 3) Corporate leverage growth has slowed, and the bank non-performing loan ratio is lower than during the AFC period.

Currently, risks are mainly concentrated in the stock market: The KOSPI's price-to-book ratio of 2x and price-to-earnings ratio of 30x are both record highs, while margin debt has doubled to 38.6 trillion won in a year and a half. The Financial Stability Index indicates overall risk is at the 62nd percentile historically (yellow light zone), while the valuation dimension is at the 91st percentile.

Model calculations estimate a 5% probability of South Korea falling into negative growth over the next year, but the risk of a vicious cycle is significantly lower than during the AFC, primarily due to a stronger foreign reserve buffer and increased exchange rate flexibility. Recessions of this magnitude have only occurred three times in the past thirty years. The core warning: If the semiconductor cycle reverses or Fed tightening triggers foreign capital outflows, the stock market could become the hub for risk transmission.