To-do-list: Korea’s Economy in 2013



Just like everyone makes their own New Year resolution or to-do-list at the beginning of every year, it seems necessary to go over economic issues and related policy measures for today.

A recent report from a think tank, KIF (Korea Institute of Finance) suggested several issues to be considered, and provided some feasible approaches to resolve the issues. Please note that the contents do not reflect any official opinion from the FSC.

First, household debts keep climbing over the mountain. Based on statistics, loans to households have constantly increased for years over 800 trillion. It is expected to keep growing, unless the overall economy shifts upward soon enough.




Evidently the average delinquency rate of households already exceeded 1% during 2012, and possibly it will be hanging on all time high level for a while. Since uncontrollable default rate soaring may cause credit and liquidity risks and lead banks to a possible bankruptcy, certain precautionary measures to prevent any economic turmoil from households’ loan should be considered in advance.


Second, corporations are also facing a hard time to run their business under the longer-than-expected recession. More and more corporation, regardless of sizes, they are filing their bankruptcy, and demand a court receivership. Last year, the aggregate amount of bankruptcy estimated up to KRW 666 billion as of last November. Even big companies, also called as, ‘conglomerates’, ended up declaring bankruptcy, as businesses’ performances got worse along with significant credit risk.




Speaking from credit line risk, banks also tightened their belt, and they are reluctant to make new loan or to extend due date for the current loans. It is expected that corporations may face a liquidity risk, when they are in need of new loans for their operational costs or revolving existing loans. Even more corporate insolvencies may occur. In order to avoid more tumble-down of corporations, it is strongly recommended that creditors, mostly banks, and other debt restructuring programs should initiate corporate workout programs.


Third, microcredit, which provides financially-vulnerable households with loans, does not seem to work in a super-effective way. Since banks are unlikely to provide loans without securities, the current government offers microcredit for low-income households meeting eligibility criteria. To facilitate microcredit programs, the government should be able to encourage more financial institutions to offer such loans to households with a long-term perspective.


Fourth, economic recession with a low interest rate weakens a capital flow cycle. Banks and other financial institutions focus rather on disposing bad loans than on executing new loans to control delinquency ratio.




Therefore, overall revenue is expected to stay afloat or worse without active business practices. It may weaken financial health of institutions, causing a high level of vulnerability to any external risk. Constant monitoring on financial liquidity risks of overall financial institutions shall be necessary.


Finally, safety on financial consumer and financial watchdog governance issues need to be revisited. In the wake of financial crisis, protection of financial consumer attracts lots of attention, as there were many financial consumers who were badly affected by financial fraud. For example, the recent mutual savings banks’ turmoil is a notable episode. In addition, the governance on financial market is in process of discussion in order to oversee the overall financial market in more effective and efficient ways.




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