Korea speeds up reform programme

Key reform tasks for the Korean economy were outlined by a senior Ministry of Finance and Economy official (MoFE) at FinanceAsia''s Korean debt conference in Seoul yesterday.

In a headline address, Cho Won-dong, deputy director general for Economic Policy Co-ordination acknowledged that the coming few months will be crucial in showing the international community that Korea is serious about maintaining reform momentum.

"Despite much progress to date, recent market turbulence suggests the need for our greater reform efforts," he said. "As such the government has just announced specific plans to expedite financial sector restructuring with additional public funds of W40 trillion, to meet the additional demands stemming from the corporate work-out process, including that of the Daewoo Group and the banking sector clean-up process."

He commented that by the end of October, individual banks' normalization plans will be reviewed to determine their fate. "For those banks judged to have difficulties carrying out normalization on their own, public funds will be injected first to turn them into clean banks before seeking optimal measures, which include absorption into financial holding companies," he explained.

Local bankers say rescue plans have just been submitted by six banks comprising Cheju, Cho Hung, Hanvit, Kwanju, Korea Exchange Bank (KEB) and Peace Bank. The two largest of the six - KEB and Hanvit - both failed to meet Capital Adequacy Ratios (CAR) of 8% after the last quarterly reporting date to the Financial Supervisory Commission on June 30.

Under the Commission's Forward Looking Criteria, all banks have to report Capital Adequacy Ratios of 10% on each quarterly reporting date and in Hanvit's case the problem has been worsened by the fact that it has been told to increase its provisioning against Daewoo Motors from 38% to 65%.

Analysts say that although the bank reported a CAR of 8.8% on the back of W93 billion in losses during the first half of the year, the FSC increased the loss to W710 billion, implying a CAR ratio of below 7%.

By the end of the month, the government is expected to submit plans to the National Assembly, which will result in the injection of W2.8 trillion ($2.5 billion) into Hanvit and W400 billion into KEB. A further Won200 billion will also be injected into KEB by Commerzbank, which holds a 32.2% stake.

These injections should be sufficient to bring both banks above 10% and bankers believe that KEB will be allowed to remain an independent entity, while Hanvit will be merged with Cheju and Kwanju into a super bank.

A separate merger of Hana Bank, KorAm Bank and Housing & Commercial Bank (H&CB) is not likely to take place, however. Given that insurance group Allianz owns 12% of Hana, while ING Barings owns 10% of H&CB and the JP Morgan and Carlyle consortium 40.7% of KorAm, foreign investors would end up owning more than half the total. Bankers further add that a tie-up between Hana and H&CB is also likely to be blocked by the their respective foreign partners since both are competing heavily against each other in the insurance sector.

Cho reiterated, however, that the government is committed to completing reforms that will improve the fundamental structure of the economy, rather than rely on quick fixes to any particular problem of the day. He also said that although the economy is likely to average 8% GDP growth this year, it will moderate towards a more sustainable 5% to 6% level over the medium term.

But he added that, "indicators are only a reminder of the work ahead of us to make sure that Korea stays on a growth path." He also concluded that it was hard for the country to stay on course when faced by so many uncontrollable external uncertainties, such as rising oil prices, a volatile semiconductor sector, the possibility of a hard landing in the US and unstable currency fluctuations in South East Asia.

"Even a one dollar increase of oil prices worsens the current account by $1 billion, causing consumer prices increases by 0.2%," he said.

Yet in describing Korea as an 'open economy' - an epithet that would have been unthinkable only three years only - Cho said that the country had to accept external shocks and concentrate on getting its own house in order. "We firmly believe that restructuring and reform will not only ease out uncertainties of domestic origin, but also assure foreign investors of Korea's management capability to deal with uncertainties of external origin," he concluded.

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