Not investment in kind in the Export-Import Bank of Korea (Korea Eximbank) but cash assistance for the bank is giving the bank an unexpected trouble.
The government suddenly changed its course to investment in cash after pushing forward with investment in kind through stocks of government-run companies such as the Korea Highway Corporation. The change from investment in kind to cash contributions reflects that the government was concerned about the bank’s financial soundness.
The payment of one trillion won (US$869.5 million) in cash is the payment of the high amount of cash in the history of the Korea Eximbank. The bank’s investment in cash reached 100 billion won (US$86.9 million) and 550 billion won (US$478.2 million) in 1998 and 2009 respectively. Korea’s exports dropped sharply, increasing financial support by the bank as Korea faced an IMF bailout program and a financial crisis in 1998 and 2009, respectively.
This year, entire investment including investment in kind hit a record high, too. The Korea Eximbank will receive investment of 1.5 trillion won (US$1.3 trillion) as the payment of one trillion won (US$869.5 million) in cash was decided after receiving investment of 500 billion won (us$434.7 million) in kind from the Korea Development Bank in May.
The government’s emergency financial support of investment in cash is increasing a burden on the Korea Eximbank. If investment in kind is made as planned in the first place, it will have to raise the BIS ratio only. But in the case of the government’s investment in cash, it cannot justify the avoidance of accumulating reserves. This was why the government sought internal solutions such as the issuance of Coco bonds not the government’s investment.
Finally, the Korea Eximbank needs to accumulate reserves for vulnerable sectors such as the shipbuilding industry within this year. But in this case, the bank becomes more likely to turn to the red. As STX Shipbuilding went into a court receivership in May, the Korea Eximbank already put aside nearly one trillion won (US$869.5 million) as reserves in the second half of this year.
The key is Daewoo Shipbuilding & Marine Engineering (DSME). External and internal experts’ opinions are that reserves for DSME should be applied at a time when the government made the highest-ever investment in cash in the Export-Import Bank.
The Korea Eximbank classifies DSME’s exposure into the normal grade (0.85%). But it the normal grade becomes the attention grade, the bank should prepare nearly 650 billion (US$565.2 million) in reserves. Besides, Hyundai Heavy Industries and Samsung Heavy Industries that handed in self-rescue plans have exposures of 5.77 trillion won (US$5.01 billion), 4.32 trillion won (US$3.75 billion), respectively.
Another trouble is BIS ratios. The Korea Eximbank’s BIS ratio dropped to 9.9% in the first quarter of this year. The bank needs about one trillion won to set its BIS ratio at its target, 10.5% or higher. The Korea Eximbank earns about 1.3 trillion won (US$1.13 billion) via its own business operations. Finally, even considering the government’s investment of one trillion won (US$869.5 million) in cash, combined funds for raising the BIS ratio and saving reserves will definitely force the bank to go into the red.
Some experts have been saying that the export-import bank reached its limitations with export finance support reduced from the previous year in 40 years since its foundation. Under these circumstances, if the bank switches to the red, definitely voices will be raised over a need to reestablish the bank’s roles.
Externally, it may lead to a trade friction. According to the export credit agreement of the Organization for Economic Cooperation and Development (OECD), if government-run organizations such as Korea Eximbank stand losses to support industries of their countries, it is called “a distortion of trade order.” If the export-import bank results in a deficit, Korea will hardly avoid international criticism that Korea protects its industry via a government-run bank.