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‘Crisis is not over’: Kim says the current global crisis is as crucial as the Great Depression.

World economy has been experiencing the most critical crisis since the Great Depression in the 1930s. Euro crisis which started from Greek financial deficit has now spread to Spain’s bank crisis. At the executive council meeting on June 4th, Seok-dong Kim, the chairman of Financial Services Commission (FSC), diagnosed the global economic challenge to have originated fromEurope.

 

At the meeting, Kim emphasized the importance of the ability to confront crises. He discussed the possible reasons behind deteriorating crisis inEurope, stating the conceptual problem of the single currency as well as the Greek government’s failure to respond expeditiously.

 

The ambiance of the meeting room grew tense as the debate moved on to the Spanish crisis. Since, the economic size ofSpainis five times larger than that ofGreece, if theSpain’s crisis becomes a reality, the impact on the world economy and the financial market will be beyond imagination. Given the situation, Kim requested people to realize the seriousness of the current situation and to take proactive measures.

 

During the meeting, the executives suggested another analogy. The devastating circumstances of Euro crisis could not help but be compared to the unforgettable economic tragedy, the Great Depression. The similarity lies in each event’s strong momentum to shift existing economic paradigm into a new one. We have already witnessed the Great Depression drive out a principle of laissez-faire, and bring forth revised capitalism. Now we are on the brink of another transition to a newly advent paradigm, so called capitalism 4.0*, which will highlight the market autonomy with better stability and order, the protection of investors, and social responsibility. As one of the main organizations responsible for the installation of capitalism 4.0 inKorea, FSC and financial fields will have to carry out these adaptations with much care to overcome the crisis.

 

*capitalism 4.0 – refers to the latest version of capitalism. The idea was suggested in the book Capitalism 4.0: The Birth of New Economy in the Aftermath of Crisis by Anatole Kaletsky. Briefly, capitalism 1.0, 2.0, 3.0 and 4.0 matches to Adam Smiths laissez-faire, Keynesianism after the Great Depression, Regan’s new paradigm after the stagflation in the 60-70s, and the well balanced capitalism in construction today, respectively.

 

What we have done

 

Thanks to many experiences from 1997 Asian financial crisis and 2008 global financial crisis,Koreais already well trained for crisis management. First of all, Korean government has cleaned up the troubled savings banks which were one of the most obstructive factors. Twenty savings banks which amount to 40% of its assets were successfully cleaned up without injecting public funds. This successful action curbed the spread of distrusts and anxieties from other banks. Moreover, a well-planned-out strategy was established by the government to control household debts. Policies such as microfinance were reconsidered within this context to include the lower income households.

 

In addition, the plans against the danger of bubble in Korean capital market are in smooth progress. The amount of call money on stock firms has decreased from 13.9 trillion won in May 2011 to 8.2 trillion won this May. The credit loan balance was reduced by 38.5% this year. Speculative trades are restrained by raising FX margin deposit and planning to make healthy ELW market. Lastly, Stress test of banks inKoreahas been performed since the second quarter of 2011, earlier than any other countries. At the same time, delivering medium and long term foreign funds has expanded. These efforts fostered the ability to react against the foreign capital deficit which was one of the most vulnerable at every crisis in the past.

 

What we have to do

 

Chairman Kim insisted that even though we have made a considerable effort to build strong risk-handling system against the financial crisis, all our endeavors may become useless if not equipped with proper policy and prompt reaction. With this in mind, he addressed that the crisis management plans should be ready to be applied whenever they are needed. A brief outline of future direction of policy is as follows.

 

As mentioned before, one of the continuous issues for Korean economy was how to cope with the market volatility. The vulnerability of Korean market has always been the high dependence on foreign capitals. However, through constant inquiry, FSC has come up with numerous methods to mitigate the fluctuation. FSC will strictly regulate the short selling by improving transparency. At the same time, intensive monitoring on ELW and FX margin trade will be conducted. These will encourage removing immoderate speculative trading and restructuring foreign dependent capital market.

 

Another point brought up was the significance of protecting small and medium enterprises (SMEs). These enterprises are what consist of so called “the real economy”. The real economy takes up a considerable ratio of trade not only with GDP but also with the capital market. Moreover, the real economy is also a vulnerable subject to further proliferation of Euro crisis. Thus, it is inevitable assignment for FSC to establish a secure bulwark to help SMEs survive through the crisis.

 

On top of all these efforts, Kim promised that FSC will take endless actions against the potential crisis and market jitters with much readiness and investigation.

 

Chaehack Suh(chaehack.suh@gmail.com)


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

Korea elevated to a “Developed” Market in Global Equity Indices evaluated by FTSE

Last September, the FTSE, London-based major global stock index compiler, upgraded Korea’s stock market from an “advanced emerging” to a “developed” one. Many reported that it would bring many benefits to Korea. Korea’s money market can secure liquidity provided by global investors from all over the world, especially from Europe. The global stock index is important because one country’s status in global index such as the FTSE index affects its stock market as well as its economy. Then, firstly let’s find out what the FTSE is. 

1.       What is the FTSE? 

 According to the FTSE’s official website (http://www.ftse.com), FTSE is an independent company jointly owned by the Financial Times and the London Stock Exchange. It aims to give objective market information by developing its own indices. The FTSE indices have been announced by the FTSE since 1999 and they are used by many global investors. The FTSE indices especially play a key role to benchmark the performance of the investment of the European funds estimated 2.5 trillion dollars. The FTSE indices classify 72 countries in the world into 4 categories: developed, advanced emerging market, secondary emerging, and frontier markets.  

2.       Classification of FTSE Global Equity Indices.      (* FTSE Country Classification September 2009 Update)

FTSE Global Equity Indices: 72 countries 
Developed  Advanced Emerging  Secondary Emerging  Frontier 
Australia, Austria, Belgium/Luxembourg, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland, United Kingdom, United States  Brazil, Hungary, Mexico, Poland, South Africa, Taiwan  Argentina(to be moved to Frontier from September 2010), Chile, China, Columbia, Czech Republic, Egypt, India, Indonesia, Malaysia, Morocco, Pakistan, Peru, Philippines, Russia, Thailand, Turkey, UAE(from September 2010)  Bahrain, Bangladesh,Botswana, Bulgaria,Côte d’Ivoire, Croatia, Cyprus, Estonia, Jordan, Kenya, Lithuania, Macedonia, Malta (from September 2010), Mauritius, Nigeria Oman, Qatar, Romania,Serbia, Slovakia, Slovenia, Sri Lanka, Tunisia, Vietnam 
25 countries  6 countries  17 countries  24 countries 

3. Evaluation Standard     (* FTSE Country Classification September 2009 Update)

1> Market and Regulatory Environment

2>Custody and Settlement

3> Dealing Landscape

4> Derivative markets

4. Process of Assessment

 

 

 

 5. What does it mean?  

 1> Korea becomes one of the advanced capital market in the world. 

2> Attracting more global investors 

Korean stock market will be less uncertain and volatile and can expect money from European fund, amounting to 2.5 billion dollars, and other global investors. 

3> Improve Korean Stock Market structure 

Status upgrade will bring about 2 major effects; 1)Reducing volatility in the domestic capital market 2) Attracting more capital from global investors.   

4> Help Korea be listed in the MSCI index

Last June Korea failed to be listed in the MSCI world index. However, as Korea becomes one of the advanced market index, it will help Korea’s stock market to be listed in the MSCI world index. 

5. What is the MSCI? 

MSCI index is announced by Morgan Stanly Capital International which is the affiliated company of Morgan Stanly. What is the MSCI? As we saw, FTSE index influences greatly on European fund, whereas MSCI index affects American fund. Around $3.5 trillion are transacted by the MSCI index. MSCI announces several indices. Among them, ACWI, World Index EMF index are important parameters for the international investors. The ACWI(World Country World Index) which handles 49 countries of the world, World Index which contains 23 developed countries including U.S., U.K., and France, and EMF(Emerging Market Free) Index which includes 23 emerging country such as BRICs and Korea.

Press Release_January 9th

The FSC Chairman Chin Dong-Soo met Adair Turner, Chairman of UK’s FSA at the FSB plenary meeting in Basel, Switzerland, January 9. They basically agreed upon the revision of the MOU to expand exchange of information and personnel between the two organizations.

G20 Summit is coming

South Korea has become the first Asian country to hold the meeting of the world’s 20 major economies, which represent 85 percent of global output. South Korea hosting the next G20 meeting seems to mean a lot to South Korea itself and to other countries as well. Let’s have a look why G20 gathering is so important than any other forum or conference and what made South Korea become hosting country.

 G20 became an upcoming power while emerging countries get economic influence among the global crisis. G20 first started from Minister of Finance’s meeting between IMF and the leading 20 countries members. The first meeting was held in December 1999 in Berlin, where Minister of Finance and the governor of central bank were presented. Through this meeting, G20 was expected to play an important role in global recovery by discussing global financial stability and drawing up the framework for corporations. The full scale of G20 summit was held initially as temporary meeting  by the suggestion of France when the global crisis occurred. The first summit was held in November, 2008 in Washington and the second was in April 2009 in London, and the third in September Pittsburgh.

Why South Korea as a chair country?

Korea was an outstanding country to quickly overcome global crisis which was the greatest goal of G20. Korean economy  fell down right after 1997 of Asia financial crisis but it recovered soon within the short period of time. Besides it also showed the fastest recovery from this Lehman Brothers emergency and OECD, IMF international society gave unstinted praise for overcoming the economic crisis. This may have influenced the G20 summit to be set up in Korea.

In addition, Korea has the leading position to go-between the emerging countries and the developed countries. Having experience of turning from the poorest country to one of the advanced countries within 50 years, Korea will be expected to perform as the part of mediator effectively. Therefore, G20 summit held in 2010 after all will raise South Korea’s role to higher status in the international community.

Peter Petri, professor at the Brandeis International Business School in Honolulu, Hawaii, said Korea should strengthen its leadership role in the region. He also said that “Korea is ideally positioned to assume a bridging role between advanced and developing worlds, as well as between Asia and the rest of the world. At the November G20 summit, it should represent interests and concerns of the entire region and strike a balance with those of the West.”

Korea gets what?

The significant role of being the host country of G20 Summit next year also turns out to be a great chance for Korea to improve its national prosperity. According to government data, up to 15,000 foreign delegates are expected to come and this will be a good chance to show improved image of South Korea. Not only the size and the economic benefit in tourism revenue but it means Korea stepping up to a new level.  As such, South Korea will be taking influential part in coordinating the global exit plan. Therefore, G20 summit is expected to raise the country’s voice and profile in the international community.

New challenge for South Korea

 But, there are still challenges remained when hosting G20 summit and playing a perfect role between advanced and developing economies in the forum.  Different interests of the four superpower groups- the United States, Europe, new emerging powers and the rest of the world- will undoubtedly produce complications. Therefore, it is expected that Korea should be providing leadership which emphasizes horizontal, integrated, systemic approaches over the vertical features of the representatives.

Progress on Corporate Restructuring

 

moneyIt is true that Korean economy shows quicker recovery than any other OECD countries, but we can’t be so relieved since risky factors still exist such as slow improvement of export situation. Still, a lot of major developed countries show delayed economic recovery, threatening Korean market which relies much on export.

 A corporate restructuring is one of the strategies to remove recovery-disturbing factors, a policy which will result in facilitating effective fund liquidity. Accordingly, recognizing the necessity of restructuring, the Korean government discussed current progress and determined future plans of corporate restructuring throughout the President-led economic policy meeting on Sept. 3.

  Now, let’s see the details.

 Current Progress of Corporate Restructuring

 Restructuring of Conglomerates

– Contractual agreements on improvement of the financial structure with the nine conglomerates: intensive self-rescue plans including subsidiary restructuring, asset dispositions, and capital expansions

– Reviewing and encouraging the self-rescue plans through the main creditor banks

 Industry-Specific Restructuring

– Given the first consideration to construction, shipbuilding, and shipping industries regarded as primary insolvents, 46 of the 277 companies were selected for restructuring.

– Most of the creditors and the workout companies have concluded MOUs, rescheduling debt and implementing self-rescue plans; 6 companies have already been normalized.

  Restructuring of Large Individual Companies

– According to the Corporate Restructuring Promotion Act, creditor banks conduct annual credit risk evaluations on large companies with credit obligation of up to KRW50 billion; the evaluation was conducted earlier, June 10, and stricter this year than before.

– Concrete implementation based on the evaluation; 2 of 22 companies have graduated from workout.

 Restructuring of SME

– Stronger risk management and evaluation & Continuous support of funds.

– Credit risk evaluation for three times until the end of November this year.

   Though the policy seems like a close and tight net to select workout companies, there are several trials and errors, but some countermeasures also exist.

 Issues & Countermeasures

 Selection Process Stage

Possible permissive evaluation of credit risk caused by deterioration in actual results of banks and by expectation of economic recovery

-> Reviewing the ability to absorb deficits & Encouraging stricter evaluation

 Restructuring Stage

Possible delays in restructuring caused by different views among creditors & Bottlenecks in issuance of guarantees

-> Preparing supports as many as possible only if they would not lead moral hazard: Raising the Vessel Fund & Reducing required loan-loss provision when creditors extend new capital to workout companies

  Korea appears to have been wisely dealing with the given situation. David A. Wyss, a chief economist of S&P also said on Yonhap News that Korea is doing well. However he also commented that the recovery could be slow down and global economy possibly went back to recession.

Then how does Korea prepare for the uncertain future?

 Future plans of restructuring

 Global Recession– Prompt conclusion of ongoing restructuring

– SME credit risk evaluation & interim conglomerate evaluation

– Disposition of NPL’s from restructuring progress: Lowering insolvent obligation to 1% until the end of this year

– Regular improvement of systems to aid restructuring: Raising funds & Stimulating M&A

 

 As China extends its economy by importing plants, Korea and Japan have become its main suppliers. In addition to this fact, several indexes indicate that Korean market will be quickly normalized. To escape from global recession, not only prudent exit strategy but also proper aftermath management should be conducted. For the stable recovery process, it is important to carry out strict corporate restructuring without carelessness.

  Let’s keep watching how Korean industries get healthier and how Korea defeats global recession~!