[William Pesek] Korea battens down hatches

The threat of financial contagion isn’t always bad.

Take South Korea, which is taking the hint from Europe’s fast-worsening sovereign debt crisis. It’s devising plans to cut its fiscal deficit next year and loudly publicizing the effort ― just in case credit-rating agencies get any ideas about downgrading Asia’s fourth-biggest economy.

Asian peers should do the same. Heading off any worries by credit raters or investors will pay dividends as 2012 approaches. That’s because the market chaos that’s likely to course through Asia will be as intense as it is indiscriminate.

Korea has good reason to act now. In 2008, at the height of the post-Lehman Brothers market meltdown, traders buzzed that Korea might be the next Iceland and go bust. It was always a silly storyline; Korea’s economic and financial upgrades following the 1997 Asian crisis were deeper and savvier than markets realized. Korea confounded its critics.

There’s every reason to think Korea would stand its ground should the world experience financial crisis 2.0. Yet it’s wise for officials in Seoul to batten down the fiscal hatches as a renewed sense of panic oozes around the globe.

The Ministry of Strategy and Finance yesterday said the budget deficit will shrink to 14.3 trillion won ($12.2 billion), or 1 percent of gross domestic product in 2012, from 25 trillion won, or 2 percent this year. In terms of the macro-economy, Seoul expects annual growth in the mid-4 percent range between 2011 and 2015, similar to the International Monetary Fund’s estimates.

Korea isn’t devoid of big challenges. The government is grappling with a fast-aging society and low birth rate, and success in either area is easier said than done. It also is contending with what might be called the “Korean sandwich.” For all its merits ― healthy growth, rising standard of living, educated workforce and world-class companies ― Korea is sandwiched between wealthy Japan and low-cost China.

At a time when sovereign debt is the new subprime, though, Korea’s problems are arguably good ones to have. And unlike policy makers from Athens to Washington, Koreas’ plan to act. Officials across Asia should follow Korea’s lead.

By William Pesek

William Pesek is a Bloomberg View columnist. ― Ed.

(Bloomberg)