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Reflecting this fear, the country's financial market was severely rattled on Monday, with the local currency plunging to a 46-month low against the U.S. dollar and stocks sliding to a 17-month low.
The won closed at 1,116 to the greenback, down 27 won, or 2.5 percent, from Friday's closing, marking the lowest level since it hit 1,118 won on Nov. 3, 2004.
Due to worries over a volatile currency market, the country's benchmark Korea Composite Stock Price Index (KOSPI) tumbled 4.06 percent to 1,414.43, the lowest level of the year since March last year. The junior tech-heavy KOSDAQ index also took a nosedive of 6.61 percent to end at a 40-month low of 439.21 due to panic-driven sell-offs by individual investors.
Foreign investors sold a net 2.2 trillion won (US$2.0 billion) worth of stocks in the country's main exchange since Aug. 17, reflecting their pessimistic outlooks for the South Korean economy. In the first half, foreigners had already sold a net US$9.6 billion worth of stocks.
Analysts say the financial turmoil stemmed from a global economic slowdown but was worsened by jitters over the so-called September liquidity crisis in South Korea with a massive capital outflow.
Local bonds worth US$6.7 billion held by foreign investors are set to mature this month, nearly five times higher than the monthly average value of maturing bonds owned by foreign investors. If foreign investors take their money and walk away, rather than reinvesting in the domestic bond market, it would boost demand for the dollar, furthering a decline in the won's value.
Still worse, South Korea's trade deficit swelled to US$3.23 billion in August mainly due to high import costs of oil and raw materials, according to the country's commerce ministry on Monday.
August exports gained 20.6 percent from a year earlier to US$37.39 billion on the weaker local currency, but imports jumped 37.0 percent to US$40.62 billion, resulting in the shortfall of US$3.23 billion.
The monthly deficit is the largest since the revised US$3.99 billion tallied in January. South Korea posted a trade deficit every month this year, with the exception of US$850 trade surplus in May.
"The trade deficit was attributable to high import prices of crude oil and raw materials," the commerce ministry said in a statement.
The country's crude imports rose 5.1 percent year-on-year in August to 72.5 million barrels, but its bill surged 89.7 percent to US$9.2 billion on higher international prices. The country's bill for steel product imports also jumped 129 percent in August from a year earlier.
South Korea's accumulated trade deficit for the first eight months stood at US$11.57 billion, compared to a surplus of US$8.44 billion for the same period last year.
The current account balance is expected to swing to a deficit this year for the first time since the 1997 Asian financial crisis. Analysts say the deficit would go to about US$10 billion. In 2007, South Korea had a US$5.95 billion surplus.
According to the central Bank of Korea, the country's capital account, which tracks cross-border investments, recorded a net outflow of US$5.77 billion in July, compared with US$3.99 billion in June in the wake of foreign investors' selling spree.
Adding to concerns about a liquidity crunch, the country's foreign exchange reserves fell by US$10.6 billion in July, marking the biggest-ever monthly drop, to post US$247.5 billion.
The foreign reserves, which fell $14.7 billion, or 5.6 percent, during the first seven months of this year, are expected to further dwindle in August as the financial authorities dumped the U.S. dollar in the local market to bolster the won.
Government officials said the foreign reserves are still enough to cope with any possible turmoil. But the country's short-term foreign debts with maturities of one year or less have reached $215.6 billion, accounting for more than 87 percent of its total foreign reserves, which sounds the alarm.
Economists say South Korea could turn to a net debtor country this year, which could dent its international profile, they warn.
They say South Korea is unlikely to slip back into a financial crisis, but forecast the country to suffer financial turmoil in months to come.
"The risk of another financial crisis is exaggerated, but the volatility and uncertainty is likely to linger in the markets for the time being," said Ahn Sun-kwon, an economist at the Korea Economic Research Institute.
South Korea was compelled to go to the International Monetary Fund in December 1997 for a record $58 billion bailout to avoid a national debt default. South Korea's economy shrank 5.8 percent in 1998 in the aftermath. After years of painful restructuring, the country repaid the full amount of loans from the IMF in 2001.
