The government pressured brokerage houses to change their outlook on the Korean economy in their reports from “gloomy” to “positive,” financial industry sources said.

The move has sparked fury from some economists and analysts who said the “nonsensical” intervention encroached on the independent research activities of securities firms and investment banks.

“The Finance Ministry in the past made phone calls to several economists who projected negative outlook on the Korean economy,” said an economist, asking not to be named.

“This time, the pressure was on Morgan Stanley and Nomura Securities, which published such doom perspectives about the Korean economy,” he said.

As global stocks went ballistic on debt jitters in Europe and the United States from late July, Seoul officials nervously watched economists publish worsening outlooks for the trade-dependent local economy.

Government officials did not deny the alleged intervention.

“The government can corner them (brokerages) down if their reports seem excessively pessimistic and biased,” a government official said, speaking on the condition of anonymity.

Apparently bowing to the pressure, both Nomura and Morgan Stanley released fresh reports praising the economy’s resilience in the second week of August, right before Financial Supervisory Service Gov. Kwon Hyouk-se held a meeting with chief executives of foreign investment banks’ Korean units on Aug. 12.

Earlier last week, President Lee Myung-bak instructed chief financial policymakers to better explain the economy’s improved fundamentals to the foreign press and brokerages in a meeting hurriedly convened after stocks crashed to a two-year low.

While the FSS, the nation’s financial regulator, said the meeting was aimed at informing foreign analysts of the accurate state of the local economy, sources said the regulator sought to slam “biased” reports.

Seoul stocks crashed almost 20 percent this month on market expectations that Asia’s fourth largest economy will suffer more than others due to its large trade exposure with the U.S. and Europe. Exports account for more than half of Korea’s gross domestic product.

Economists said the alleged intrusion is a poor and outdated tactic eating into the authorities’ reputation.

“It doesn’t make sense for policymakers to stick their noses into independent analysis by economists who have years of expertise covering the Korean economy through many crises,” said another economist at a local brokerage.

“They shouldn’t try to regulate reports by asking the CEOs to manage economists especially if they aim to host more foreign brokerages in Yeouido (in Seoul) and create a financial hub there,” he added.

Kwon Young-sun, a Nomura economist, argued it would be irresponsible for an economist to keep quiet about a coming risk due to government pressure.

“The Korean economy does have strong fundamentals to bounce back fast,” he said. “But analyzing the situation with different variables is an important part of risk management for investors,” he was quoted as saying.

Nomura said in June that Korea is most vulnerable to debt the crisis in the eurozone, but improved its outlook in its Aug. 11 report where it cited the nation’s sufficient foreign exchange reserves and flexible exchange rate regime to say that those “should provide a buffer to any potential negative shock.”  The two reports were written by different economists.

"The economist at Singapore’s strategy team focused on different economic indicators from the ones I used for the Nomura report released later," Kwon said.

Walking out of the meeting with the top regulator, the Morgan Stanley Korea chief downplayed responsibility for the earlier report, saying papers from Singapore and Hong Kong are out of the control of the local office.

“Economists in Seoul office were not part of the report, we can’t do anything about what’s coming out of other Asia offices,” Yang Ho-chul, CEO of Morgan Stanley Korea, told reporters after the meeting with FSS Gov. Kwon.

Morgan Stanley on July 25 had said “Korea remains most exposed” to the debt woes in Europe, but changed its stance in its Aug. 9 report where it said “although there are still concerns about Korea’s exposure to Europe’s financial system through external debt, we believe any subsequent capital outflow and KRW depreciation will be much more orderly this time.”

The investment bank, in its third report on Korea in a month on Aug. 18, went rosy and said “We need to remove the stigma that Korea is vulnerable to external shocks.”

But government officials say some brokerages’ reports do not properly reflect improved fundamentals of the nation’s economy.

“Some tend to be excessively negative and they make such judgments based on very few indicators. Korea’s external debt structure and foreign reserves are in much better shape,” an official said.

An FSS spokesman declined to comment on the authorities’ allegedly coercive approach toward the securities industry.

By Cynthia J. Kim 
(cynthiak@heraldcorp.com)