In this report:

• 'Sea change in sentiment'
• Falling interest rates

SEOUL, South Korea (Reuters) -- A special parliamentary hearing on the causes of South Korea's 1997 financial crisis is set to convene next week, a spokesman for the ruling party said on Sunday. The hearing comes while South Korea continues its remarkable financial recovery.

After staring into the abyss of national bankruptcy a year ago, South Koreans are enjoying an economic revival that's nothing short of stunning.

Some fear things are going almost too well.

The stock market has risen almost 10 percent since the new year began, following last year's world-beating 46 percent gain.

The won, whose free fall at the end of 1997 plunged Korea into crisis, has since recovered some 70 percent of its value from a low of 1,995 to the dollar in December of 1997.

Fearing a loss of export competitiveness, the government, in fact, has been trying "verbal intervention" to stem the rising won, which ended at 1,183.5 to the dollar on Friday.

Research houses are scrambling to rethink their growth estimates for 1999, after the central Bank of Korea in the past week said it had revised its gross domestic product projection (GDP) for 1999 to 3.2 percent growth from an earlier one percent growth.

The government has provisionally estimated GDP contracted 6.1 percent in 1998 after 5.5 percent growth in 1997.

"There's been a sea change in sentiment," said John Dodsworth, the International Monetary Fund's chief representative in Seoul.

"Positive sentiment has been a critical element in the recovery, but there's still some way to go in terms of producing a sustainable recovery," he told Reuters.

Indeed, department stores are crowded again, auto sales have picked up, wholesale and retail sales have been climbing steadily since August.

The key bankruptcy indicator is at a 27-month low.

Major credit rating agencies have revised their outlook on Korea's country credit ratings to positive, heralding an upgrade to an investment-level rating in the near future.

That would clear the way for more outside investment and allow Korea to borrow cheaper money abroad.

But is South Korea experiencing a case of "irrational exuberance," to borrow a phrase from U.S. Federal Reserve Chairman Alan Greenspan?

"We should not give too much weight to the good showing of the financial indices," South Korea's leading newspaper, the Chosun Ilbo warned in an editorial on Thursday under the headline, "Need to Guard Against Economic Bubble."

"It may be only giving us a false sense of security."

The newspaper noted that domestic investment is still flat, industrial output sluggish and the appreciating won is bound to hurt exports this year.

Dodsworth dismissed fears the frothy markets could lead to a bubble. "No, I don't think we're at that point at this time," the IMF executive said. "There are very strong portfolio inflows, which are strengthening the won, but that gives you a bit more scope with interest rate reduction.

"An interest rate reduction will help the real economy. We should not forget that we're in a recession and we need all the help we can get to recover the real economy," Dodsworth said.

Warburg Dillon Read Branch Manager Richard Samuelson said his brokerage is revising up its 1999 GDP estimates over signs of improved consumer consumption.

"In December we revised upward our forecast to negative 1.9 percent from negative 3.9 and the risk is we'll revise upward again," he said.

"We've been telling clients to buy (Korean stocks) for some time and on balance we have grown even more bullish with time as interest rates have fallen," Samuelson said.

Benchmark three-year bond yields have fallen below seven percent after hovering above 30 percent a year ago.

Edward Campbell-Harris, branch manager of Jardine Fleming, saw improving prices for semiconductors -- South Korea's premier export commodity -- leading the recovery.

"I think the consensus is that semiconductor prices will be better or stay buoyant," Campbell-Harris said. "A lot of capacity that was supposed to come online in 1998 didn't, so if demand remains good...that will keep semiconductor prices up and factory utilisation rates rising. I think it's a big one to watch for."

Richard Wallace, head of securities at Kleinwort Benson in Seoul, said he's also upgrading his forecasts.

"What's surprising is how fast industrial output picked up at the end of the year and exports (are) showing a positive trend."

But Wallace added a caveat: "A lot depends on the world economy. What is interesting now is the strength of the U.S. economy and that's pretty benign for Korea."

Former president Kim Young-sam and 44 others were summoned to testify at next week's hearing.

A showdown between the ruling and opposition parties will likely continue as the main opposition Grand National Party plans to boycott the session, said Kim Jae-il, a vice-spokesman of the ruling National Congress for New Politics party.

The committee comprises seven assemblymen from the ruling party, four from ruling coalition member the United Liberal Democrats, and nine from the Grand National Party.

The opposition has demanded that places on the committee be equally shared between it and the ruling coalition and that key details of the hearing schedule be re-negotiated.

President Kim Dae-jung and opposition party leader Lee Hoi-chang had agreed to open the hearing on December 8, to examine the causes of the 1997 crisis that forced Seoul to accept a record $58.35 billion bail-out from the International Monetary Fund.

But disagreements with the opposition party and a squabble over the 1999 budget draft forced a postponement of the hearing. The budget draft later passed through parliament.

Spokesman Kim said the committee would hear briefings from government ministries and agencies until January 24 and then summon 45 people to testify for the remaining period.

The 44 people summoned besides former president Kim, who stepped down in February 1998 at the end of a five-year term, include Kim's second son, top economic policy-makers under Kim's government and several business leaders.

A second group of 45 people not considered to have been directly responsible for events during the crisis had also been asked to attend the hearings and make statements on key issues, spokesman Kim added.

The ruling coalition holds a combined 158 seats at the 299-member National Assembly while the Grand National Party has 136 seats.

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