Analyst: South Korea's current financial risks are structurally similar to the 1996 Asian financial crisis.

Against the backdrop of the recent sharp decline in South Korea’s stock market, domestic independent global macro research firm Tantu Macro recently released a report stating that South Korea’s current financial risks share structural similarities with those before the 1996 Asian Financial Crisis (AFC): semiconductor exports account for 41% (compared to 16% in 1996), foreign holdings in the stock market hit a historical peak of 40%, and external debt-to-GDP rose to 39.6%. However, key differences exist: 1) the foreign exchange reserve adequacy ratio (ARA) stands at 92% (only 54% before the AFC), while the share of short-term external debt has dropped to 9.4% (from 11.5% pre-AFC); 2) the free-floating exchange rate has replaced the soft peg, reducing the risk of bank runs; 3) corporate leverage growth has slowed, and banks’ non-performing loan ratio is lower than during the AFC. Currently, risks are 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, and margin balance has doubled to 38.6 trillion won in a year and a half. The financial stability index shows overall risk is at the 62nd percentile historically (amber light zone), while the valuation dimension hits the 91st percentile. The report’s model estimates a 5% probability of South Korea falling into negative growth in the next year, but the risk of a vicious cycle is significantly lower than during the AFC, mainly due to enhanced foreign exchange reserve buffers and increased exchange rate flexibility—only three recessions of this magnitude have occurred in the past three decades. The core warning: If a semiconductor cycle reversal or Fed tightening triggers foreign capital outflows, the stock market could become a hub for risk transmission.