FSC’s evaluation and measures to improve FX soundness of the financial institutions

The Financial Services Commission (FSC) along with the Financial Supervisory Service (FSS) conducted two round of strengthened regulation on FX soundness of financial institutions. The details of the conducted areas were on 2010, January, 1st increased long term financial procurement ratio, domestic banks’ FX liquidity risk management, and FX derivatives trading risk management standards. And for 2nd round of conduct was held on 2010, August, on management of FX liquidity ratio, strengthened regulations on long term financial procurement ratio, and lastly risk management of FX liquidity ratio of foreign banks’ Korea branches.

Both domestic and foreign banks in Korea were followed and the results are, in most parts FX liquidity ratio and long term financial procurement ratio has improved. However, some banks are working on improving risk management standards on FX liquidity and under the supervision of the FSS, it would have strengthened measures by the end of year 2010.

*most of the risk management systems and standards on various areas are set and operated by banks’ own guidelines.

Some of the key results obtained by the FSC are the followings.

1. FX liquidity ratio

All the banks had higher ratio than regulation guidelines. The general trend is upwards from this year and the numbers are good even after the 2nd round of implemented regulation on FX soundness.

*100% were applied for all of FX assets before however, since 2010, July, counting the potential recovering ratio it now is leveled from 35% to 100%.

FX liquidity ratio of Domestic Banks

(all in %)

Strengthened Regulation 2008 December 2009 December 2010 March 2010 June 2010 July 2010 August

FX liquidity ratio 98.9 105.1 106.8 107.4 109.7 109.2

Applied – – 94.6 97.1 98.7 98.8

7-day gap ratio 3.2 2.8 2.1 2.4 2.5 2.7

Applied – – 0.8 0,7 1.6 2.2

30-day gap ratio 0.4 1.1 2.3 2.3 3.5 3.9

Applied – – -1.4 -0.4 0.7 1.0

2. Long term financial procurement ratio

When measuring the ratio, the leverage standard was changed to over a year, however, domestic banks’ average ratio was over 130% and met the regulation.

*based on 17 domestic banks with more than USD 50 million of FX loans.

**after the strengthened regulation on 2010, August, the guideline ratio was increased to 100% and changed its manual to long term financial procurement ratio.

Long term financial procurement ratio of domestic banks

(all in %)

FX leverage 2008 December 2009 December 2010 March 2010 May 2010 June 2010 July

Procurement ratio (>90%) = year 105.6 139.6 – – – –

> year – 128.9 134.5 130.5 132.7 138.5

3. Stable FX assets Ratio

All the numbers were over the minimum ratio for domestic banks. It was 6.7% (USD 9.71 billion) of all FX reserves, resulting in well above the minimum ratio.

*Based on domestic banks with obligation to FX assets.

**2% is the minimum ratio.

4. Risk management of FX liquidity ratio.

Some banks are improving on this matter, however, most domestic banks set up internal guidelines and standards for better risk management of FX liquidity ratio. Some banks are expected to enhance the soundness of the systems by the end of the year.

5. Risk management of the FX derivatives.

All the banks operating in Korea including foreign banks’ Korea branches are trading under 125% of the previous months real transactions. And after the strengthened regulation, it was regulated to 100%.

After the supervision, most banks were trading under 50% level of real transactions.

As shown from data and numbers above, the FSC has strongly implemented strengthened regulation on FX soundness of the financial institutions. Often times blamed for main causes of the Korean financial crisis, the FX soundness should be improved and checked upon as solid as possible. The FSC plans to regularly evaluate and secure the maintenance of the FX soundness.

Jang Hee Jin (gmlwls0@gmail.com)


IFRS early-adopter’s performance

IFRS early-adopter’s performance has increased in this second divergence.


We can notice that this second-divergence record of corporation which early induceinternational account standard has been improved.



Previous month, 31, the Korean exchange(KRX) and corporation consultative councilanalyzed 26 listed companies’record and found that consolidated operating profit is KRW 8.4919 trillion , which is 14.8% increased than the first one.



Consolidated net income is KRW 7.8850 trillion that is 17.8% increased than previous one. And consolidated selling is KRW 78.8517 trillion – 11,34 increased .



There has been much bigger improvement in profits from the viewpoint of half-yearly. The first half year of consolidated operating profits is KRW 15.8883 trillion that is 103.7%increased than the first half year of last year.Consolidated net profit is KRW 14.5775 trillion – 15.4% increased than first half of last year.Consolidated selling is KRW 149.1591 trillion- 16.42 increased than the first half of last year.




What makes it increased?


The first reason of makingimprovement is, one of the characteristic of IFRS,The public announcement system which is focused on the consolidated corporation.Unlike existing Accounting standards (K-GAAP), regulating the consolidationrange by the Law-based governing relationship,K-IFRS is regulating the consolidation range by actual governing relationship. Therefore, ranges of subsidiary are increased greatly.In conclusion, in IFRS, companies have to make consolidated financial statement including some companies which are not included existing K-GAAP, like SPC(Special purpose company), PEF(private equity fund) and subsidiaries that has below KRW 10 billion of asset so they were ruled out from consolidating range by K-GAAP.


Strictly speaking, the K-IFRS perceives the selling or operating profitthat is not perceived in existing K-GAAP rather than the K-IFRS increases of achievements.It especially cut a brilliant figure in IT and automobile industry that are key industries in Korea.Because these kinds of enterprises possess excellent selling and manufacturing corporations overseas whose assets are below KRW 10 billion so were excluded from consolidation range by existing K-GAAP.Therefore K-IFRS calculates the total assets, sales and operating profit by concluding these small overseas corporations. And this feature brings about the increasing in performance. 


 However, the K-IFRS doesn’t over-estimates performance of the companies.Measuring the body of corporation based on actual governing relationship, it will be more accurate than measuring by law-based governing relationship. Considering this, the K-IFRS which connects these to a holding company more exactly than K-GAAP.



Moreover, one of the reasons is extension in recognition of intangible asset.In existing K-GAAP, R&D investment can be recognized as intangible asset only if investment has a very high probability, over 80%, which contribute to benefit creating company’s profit. Otherwise it is regarded as whole the cost for the current term. While K-IFRS admit that over 50% contribution will be approved. with this, enterpriseswill do R&D investment actively because of decrease of the opportunity cost so companies can create more value by continuous R&D.And thanks to the asset made of development cost, net income in the beginningof period when company realizes intangible asset would be increased. Because ofthe company doesn’t have to measure whole R&D investment as not a cost but an asset. This is going to effects positively to the net income of corporations which givesmuch R&D investment such as; Samsung electronics, LG electronics, Hyundai motors and so on.


Another reason is that K-IFRS doesn’t have any regulation of amortizing goodwill which is spentpremiumon the back of M&A. In general, the company’s value is composed of not an asset but the reputation, regular customers, favorable positions and many other intangible values. Therefore seller wants to receive more money than company’s value that is shown on the financial statements and we call that overpaid value as ‘goodwill’.


In the existing K-GAAP, goodwill has to be amortized constantly every year within 20 years. But in K-IFRS,as mentioned before, there is no special amortizing regulation system involved this. However, companies have need toevaluate value of goodwill every year so they record any damage immediately. only in that case, they treat it as an expense.


The asset revaluation does not affect profit growth.

The asset revaluation is one of the features of IFRS and it is an unconventional view for people who are familiar with the existing accounting theory. (K-GAAP and US-GAAP)

In the K-GAAP, Once an asset is acquired, that is just depreciated during the durable years. However, with the IFRS, if the company chooses a revaluation method for asset evaluation, Company can evaluate their assets by fair value at every fiscal year and they will realize profit and loss from asset evaluation.


Also, If the company chooses a revaluation method, their debts should be revalued every year. But contrary to asset revaluation, debt for severance is the only object for revaluation and it will be revaluated by every year.



On the fact of it, asset revaluation is also one of the reasons of increasing in performance. yet that isn’t right, because gain from asset revaluation is included in not net income but other-general gain and loss(기타포괄손익).Usually, companies are evaluated their performance by net income so gain from asset revaluation is for nothing in company’s performance.

This feature of asset revaluation is incurred for preventing company’s, especially facing difficulties in management, performance fabrication. Because If the IFRS allows companies to realize gain from revaluation as net income, they will realize as many gain from revaluation as they can. This exaggeration can cause distrust of financial statements as measurement index. In this sense, to increase the credit of financial statements, The K-IFRS rules that loss from revaluation is realized as net loss contrary to gain from revaluation. 



The plan to introduce and present condition on the IFRS in Korea,

(Road Map for the introductionof K-IFRS)



Republic of Korea has suffered inconvenience in international market after the Asian financial crisis in1997, as follows: high interest rate in financing, it’s called ‘Korea discount’, and recomposing financial statements for going public on overseas stock market which market isn’t admitting the K-GAAP. So the Korea government has tried to increase accounting transparency. Nevertheless, it was not easy to increase transparency remarkably and eventually the Korea government makes the road map on March, 2007 with global trend of unifying accounting standards. The IFRS, which is enacted by IASB, currently in use by 117 countries in the world and it is expected in use by about 150 countries in 2011.    


The present conditions of IFRS-Roadmap

<The website of IFRS-Task force team>

Since 2007, the Korean government hasestablished legal and institutional foundations. Plus which, the government hasmade ceaseless efforts for successful settlement of IFRS.


Reform of the law: The law of capital market(Feb, 2009) The law of auditing for public corporations(Feb, 2009)


Enactment of accounting standard: K-IFRS(Dec, 2007), The general accounting standard(Dec, 2009. for non-public corporations)


Education and promotion: Making and operating task force for settlement of IFRS, Nationwide presentation for regional corporations(23 times), Establishment of IFRS help desks(Oct, 2009)

Reducing Dependence on Credit ratings would Aid Markets under Basel Risk Management System

Reducing Dependence on Credit ratings would Aid Markets under Basel Risk Management System

The economics of developed and less-developed countries are now turning around. Even though there is some notice that we need to wait during at least one quarter to get a clearer idea of whether sluggish consumption is turning around, in my opinion, known by the discussion about exit strategy, our economic is in the boom state now. Coincided with this positive anticipation of economies, there are many voices that we must find out the cause of recent financial crisis and make properpolicies to prohibit the recurrence of the accident. In this view, IMF’s Global Financial Stability Report, issued at September 29, 2010, can be a very good and key reference to see what causes the recent global crisis, especially about credit rating system.

How can credit ratings be a bomb to financial market at the crisis?

Credit ratings are the indices which measure the relative risk that an entity such as a government or a company will fail to meet its financial commitments and play a significant role in certifying the quality of investments in fixed-income markets. The analysis, in the IMF’s Global Financial Stability Report, says that ratings have inadvertently contributed to financial instability. This recommends that regulators reduce their reliance on credit ratings as much as possible and increase their oversight of the agencies that assign the ratings used in regulations. Then, through what channel, credit ratings can have an effect to economy?

Regulators, for example, rely on ratings in setting standards for securities that financial institutions hold. Institutions must hold less capital to buffer against losses on higher-rated assets than on lower-rated ones. Central banks often rely on credit ratings to determine what securities they will accept as collateral on loans to bank or other financial institutions. Ratings play similar roles in private financial dealings, when securities are posted as collateral and private financial contracts often contain ratings triggers that end credit availability or accelerate a borrower’s credit obligation if a downgrade occurs.

Now, we can know that credit ratings are very important to our economies and it effects through many channels and agents in economies. We may wonder that although credit ratings are accurate enough, is it matter to rely on credit ratings when we have many transactions? The answer is, unfortunately, yes.

Rating accuracy&Basel Risk Management

The major rating agencies—Fitch, Moody’s, and Standard & Poor’s—do not target their ratings to the specific probability that an issuer will default. Instead they seek to provide only relative rankings of credit risk—that issuers in a lower grade are more likely to default than those in a higher grade and less likely than those below it.This way is not only plausible, but also does a pretty good job. The IMF report finds that the rating agencies do very well meeting that goal. For example, all of the sovereign debt that has defaulted since 1975 had received speculative-grade ratings one year ahead of their default. In other words the defaulting debt was concentrated in the lowest credit ratings.

The rating agencies also aim to ensure that ratings do not change frequently, because users prefer to avoid the costs associated with frequent policy changes and investment decisions linked to ratings. The rating agencies minimize ratings changes by judging an entity’s ability to survive a cyclical economic trough and by additionally applying various rating-change smoothing rules.But the IMF report says that these added smoothing techniques often have an opposite effect from what was intended. Typical smoothing rules sometimes merely delay inevitable downgrades that become more abrupt and cliff-like if the situation has continued to deteriorate.

The aversion to rating volatility relates to the myriad ways in which ratings are embedded in investment guidelines and eligibility standards for securities used as collateral or investment.Most of credit rating systems depend on transition matrix, which shows the probabilities from the previous crediting grades to current grades to calculating bank capital requirements known as Basel. With smoothing techniques, the transition matrix has some problems in the crisis state. Actually, Risk management system has elaborated to care about the crisis state. The trials, to reduce the disturbance in normal states by smoothing probabilities, increase the chaos in crisis state, not being the very present help in time of need.

To reduce the potential cliff effects in spreads and prices that rating changes can trigger, the IMF recommends the elimination of regulations that formally link buy or sell decisions to ratings, as some countries already have done. The IMF report also says that cliff effects could be mitigated if rating agencies refrained from using smoothing rules that effectively delay rating changes.Reducing rating overreliance will require better fundamental credit analysis by users, and it will be important that the authorities remain wary of unintended adverse consequences. Moreover, policymakers pushing to reduce rating reliance should recognize that smaller and less sophisticated investors and institutions will continue to use ratings extensively.




Recently, Basel III has promulgated. As we all know well, institutional reform means providing a stronger framework within our financial markets can operate. Robert J. Shiller compared this situation to train.


“No matter how powerful and technologically sophisticated the train, it is only as good as the track on which it runs.”


Regulatory and insurance institutions are the track that carries our financial markets. Although we develop the state of art techniques to calculate bank capital requirement under Basel III, we cannot guarantee our success in finance market if we cannot handle fundamental problem, overreliance on credit ratings.Thus, before meeting crisis again, we should all draw on our wisdom.



By Kyongchae Jung (coolman0828@yonsei.ac.kr)

Measures to support small and medium sized enterprises that exports to Iran

Difficulties Related to the Economic Sanctions &

Measures to support small and medium sized enterprises that exports to Iran

The economic sanctions

Sanctions consist of a ban on the sale and shipment of products to a country and also on the purchase of its exports. Economic sanctions are usually the most significant of all sanctions imposed on a country. They imply “the deliberate, government-inspired withdrawal, or threat of withdrawal, of customary trade and financial relations.” Sanctions are measures applied in response to wrongdoing, such as an act of aggression against another state or pursuit of a racial policy against the international law or moral standards. Although sanctions penalize delinquent countries, they are above all intended to persuade them to change actions or policies in the future.[i]



Robert Einhorn, U.S. State Department’s special advisor for nonproliferation and arms control, said in Seoul that the U.S. government requests Korea government for participating Iran sanction. To be specific, the U.S. government demands the closure of Bank Mellat.




However, to participate in sanctions with Iran will damage Korean firms. This is because when firms export to Iran they do not pay their bills in cash but through the export letter of credit (L/C). The companies exchange the L/C for cash in the foreign bank located in Korea. Thus, when the Iran bank is shut down in Korea, firms will lose the mean for settlement.



The size of trand with Iran in 2009


At the first half of 2009, the monetary amount of trade increased significantly to 97.4 hundred million dollar, which is the fifteenth largest amount.

Current situation of monetary amount regarding trading with Iran


(Unit : Hundred million won, %)

  2009 2010


2009 2010
Export  39.9 ( -8.1) 25.6 (48.6) 24 20
Import  57.5 (-30.1) 40.2 (64.4) 15 14
Profit  -17.5 -14.7    

* ( ) increased percentage of monetary amount compared to previous year





Three measures to support small and medium sized enterprises that exports to Iran


1. The support by policy loan

The Small and Medium Business Administration (SMBA) and the FSB provided the government supports by using the ‘Fast Track Program’. The Fast Track Program is related to the solution for the liquidity problem related to the sanctions. Furthermore, for the firms who heavily trade with Iran, the SMBA funds aid them. The corporation with temporary difficulties can borrow the amount below 5 hundred million won at specified interest rate from 3.7 percent to 5.4 percent.

2. The support by a bank bill

It will be allowed to extend the period of repaying the payment price, when the promissory of export bill is not processed at the right moment.


3. The support by center for difficulties regarding export to Iran

In the Korea International Trade Association established the problem solving center for errors regarding the trade with Iran. In addition, the Korean Federation of Banks set up the department that supports the obstacles related to the bank bill. The major features of these support centers are to receive the complaints as well as to inform the support system for the damage caused by the economic sanction.



Recent decision in terms of this issue


The FSC came to decision that the Seoul branch of the Bank Mellat was suspended by blocking tasks related to foreign exchange in October 2010. This is because they traded without the prior permission of the governor of the Bank of Korea.

Min Gyo Jeong (misomk@naver.com)

Introduction of DARK POOL to Korea: Panacea or Poison?

The debate on financial regulation, especially on the development of electronic communication technology, and increased desire for customized OTC derivatives is hotter than ever. From all these things, we can easily find that financial environments are varying increasingly faster and faster. After a couple of global financial crisis, global financial institutions debate about financial deregulation and investor safety. At a glance, however, to discuss about financial deregulation doesn’t seem to be appropriate. Many people think that we don’t remedy or cure to our financial market yet. Moreover, the role of traditional clearing house is more ambiguous than ever due to the technology development.

In fact the purposes of financial participants is meeting their desires. These desires are largely classified as two groups: hedging their own risks and meeting their customized needs. Former is usually considered by those who are going to regular market and second to OTC market. In traditional OTC market, the participants should find counterpart to sell or buy financial products. In this case, participants are exposed to many risks such as order exposure, scarcity of potential demand, information asymmetry, and the price differentiation. These problems are more serious when participants want to buy or sell massive amount of financial products.

Let’s assume that we want to sell a lot of financial products. If this trial is known to market participants, then the price of our financial products will decrease and, therefore, distort regular price of financial products not by their change in fundamental value but by just mismatch in demand and supply. This scenario is not desirable to both of participants, buyer and seller, of course financial supervisor. Thus those who want to have transaction with massive amount need another dealing method. This is why the DARK pool has been introduced.

In brief, the DARK pool is one of the ATS – alternative trading system – especially used to deal with massive transaction. Of course there was a way to meet the needs of massive transaction before introducing DARK pool. However, it was still was not comfortable for participants because there were exposed some risks such as information asymmetry between broker and the end of user caused by public order system. To remedy this problem, DARK pool adapted anonymous system. Therefore, DARK pool has been served as the clearing house and the frequency of massive transaction by DARK pool was increased over global market.

In this trend, KRX – KOREA EXCHANGE – installed ATS system, or K-BloX. This system meets some requirements of ATS such as anonymity, massive transaction, extra business hour transactions (시간외 매매). According to the report about transactions through K-BloX, most of transactions were Cross transaction which has anonymity because the participants rely on financial institution as if there is wall between seller and buyer.

The amount of transaction through K-BloX has increased steeply. In 2007, total amount of massive and extra business hour transaction was 43.6 trillion won and this was increased by 49.7% relatively to 2006. This reflects that the function of extra business market has fertilized which can meet the transaction demand of investors.

Extra business market 2005 2006 2007
Total amount(growth rate) 25.454 trillion won(+46.4%) 29.1763 trillion won(+14.6%) 43.6708 trillion won(+49.7%)


This uprising trend has not changed when we include business hour trading. Total massive volume of transaction are as follows.

  2007(A) 2006(B) Growth rate (A-B)/B
Payment Volume Payment Volume Payment Volume
Extra business hour(daily average) 327,822(1,332) 1,030(4.2) 213,064(862) 702.4(2.8) 53.9%(54.5%) 46.6%(50.5%)
Business hour(daily average) 98,242(399) 244.1(1.0) 50,102(202) 153.4(0.6) 96.1%(97.5%) 59.1%(66.7%)
Total(daily average) 426,064(1,732) 1,274.1(5.2) 263,166(1,065) 855.8(3.4) 61.9%(62.6%) 48.9%(52.3%)


According to these trends, Rep. of Korea’s DARK pool is increasingly hotter because of the desire of investors. The purpose of regular clearing house is risk sharing between participants, whereas that of OTC is the satisfaction of participants’ needs. ATS is one of the transactions classified into latter one. Thus, permitting ATS may aggravate the financial market by increasing many risks and it also be burden to financial supervisory authorities. However, Financial Services commission has made many market-friendly and diminishing-risk policies. We can look forward to see wise policies made by FSC.

Kyongchae Jung


Government’s measures to boost housing market transactions

Gov’t Measures to Boost Property Market in Korea

The Korean government has announced measures to stimulate housing market transactions in non-speculative demand and support low- and middle-income families to purchase their house to live in. The measures include temporary easing of debt-to-income (DTI) ratio regulation, which largely accounts for mortgage lending. With the temporary deregulation of DTI, financial institutions are allowed to decide on their own on amount of loans they can provide.

The measures are to boost housing market in Korea since a significant fall in transaction volume was detected. Many new homes remain unsold or unoccupied. Moreover, the whole industry related to the housing is in severe financial troubles.

Housing Market Transaction Volume (compared to 06~09 months)

Classification Jan Feb Mar Apr May June July
Nationwide 18.3 7.7 -0.6 -4.7 -29.2 -28.9 -20.2
Seoul &

Metropolitan area

-14.3 -26.2 -35.5 -46.2 -59.6 -60.7 -55.4
  (-1.9) (-13.5) (-35.5) (-54.9) (-66.7) (-65.2) (-58.8)
Provinces 41.5 34.4 30.1 33.6 0.4 -0.5 10.4

(Source: Financial Services Commission)

Support Measures

[1] Stimulating Housing market Transaction in Non-Speculative Demand

The government has decided to temporarily abolish its DTI regulations until end of March next year, leaving the application of DTI rules at financial institutions’ discretion; therefore, mortgage loans will be decided upon each financial institution. However, the government has decided to maintain current Loan-to-Value (LTV) ratio, which puts a price of mortgage loan based on asset values.

Tax benefits will also be extended to stimulate property market transactions. Capital gain tax relief for multiple home owners will be extended to two more years. In addition, 50% real estate acquisition & registration tax will be exempt.

[2] Expanding Financial Support for Low-Income Families to Rent a House  

The government will raise credit limits for low-income households from 49 million to 56 million won to financially support them to rent a house. Families with three children or more, the credit line will be expanded from 56 million to 63 million won. Also, the government will raise its guarantee limit for the key money particularly for low-income households with their annual income less than 50 million won. The government will also provide the landlord with loan guarantee up to 50 million won per house to help them return the key money to the tenant when their contract expires.

[3] Providing Liquidity Support for Construction Companies

The government plans to support construction companies who are temporarily experiencing liquidity crunch by issuing a total 3 trillion won of P-CBO. A P-CBO is ABS (Asset Backed Securitization) based on corporate bonds. After security companies acquire bonds of construction companies, SPC (Special Purpose Company) would issue AAA credit rating CBO (Collateralized Bond Obligations), helping construction firms raise fund more easily.  The government will begin to issue 500 billion won P-CBOs starting from the second half of this year and then may proceed with additional issue depending on market demands.

From these measures, an increase in housing market transactions and a relief for low-and middle-income households are expected. The government has emphasized that the measures will be taken temporarily to seek non-speculative transactions in the housing market, while still maintaining its stance on stable housing prices.

Eunsol Hong


Government Debt and Maintaining Fiscal Soundness in Korea

“Been there, done that”, many Korean people would’ve said when they saw Greece seeking for a bailout (support) from IMF (International monetary fund) and EU (European Union) as their government balances heavily deteriorated. Korea not only had experiences in IMF bailout program more than a decade ago, but successfully overcame a difficult period. Even though the world economy is still recovering from a financial turmoil in 2008, these financial meltdowns from Greece and other southern Europe countries could lead to another hard blow for lagging world economy. However, not all countries are running severe deficit on their government balances. Korea is considered to sustain its’ fiscal soundness of government balance. In regards to national government balance and related matters, fiscal affairs department of IMF issued their world economic and financial survey in order to monitor fiscal status of each region and countries. According to the recent issue of fiscal monitor by IMF, the average gross general government debt-to-GDP ratio for advanced economies is forecasted to rise from almost 91 percent at the end of 2009 to 110 percent in 2015. United States and United Kingdom, two countries strongly affected by recent financial crisis shall experience the largest increase of its debt where their growth prospects are weakened than others. On the other hand, for emerging economies, debt-to-GDP ratios are expected to either stay as current level or decline in 2011. Their sustainable growth and lower interest rate contributed to controlling fiscal balance as they pledged.

Hong Kong is projected to reach the lowest ratio by 2015 (0.5%), Australia (20.9%), Korea (26.2%), New Zealand (36.1%), and Switzerland (36.2%) are expected to follow. In comparison, Japan is expected to reach the worst level of debt ratio over GDP in 2015 projecting 250%. Already troubled Greece’s ratio is expected to be increased by 140.4%; Italy (124.7%), United States (109.7%), Portugal (98.4%), France (94.8%), and Spain (94.4%) are among countries projected to have high debt over GDP ratio over years to come.

Compared to other countries, Korean government successfully managed to maintain relatively solid fiscal balance and sustained its level for years. IMF reported that debt-to-GDP ratio is even going to be lower to mid-20% by 2015, which is 2nd lowest ratio among advanced economies.

Regardless of a sunny forecast and positive reports on Korean economy, it is believed that a couple of issues can not be overlooked in order to sustain the stable level of fiscal balance. One of the factors could be spendings on the healthcare system. Since Korea has extremely fast aging demographics, inevitably spendings on healthcare system would increase significantly. Potential tax revenue is expected to decrease due to the low birth rate; this could lead healthcare spendings to become a pretty heavy burden.  Also escalating amount of debt derive from local government shall be monitored.  The recent government study showed that the debt amount of local government estimates approximately KRW 25 trillion (7.96% of total government debt).  Though debt ratio over total government debt is being consistent, debt amount of local governments have grown significantly by 34.15% in 2009 compared to average 4% in previous years. Once local governments are in trouble, it is evident that the central government is to be affected eventually.  Maintaining well-balanced financial status with local government is necessary to consider as well.

Jinmok Kim