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Privatization and Restructuring to Be Accelerated in Stable Market Conditions
Financial Industry Outlook
Privatization and Restructuring to Be Accelerated in Stable Market Conditions
  • By matthew
  • January 31, 2014, 04:25
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This year, the Korean financial market is expected to show relatively stable growth based on robust fundamentals, in spite of internal and external risks such as those brought about by the tapering of quantitative easing.

According to the financial industry outlook announced by the Financial Policy Bureau of the Financial Services Commission (FSC) on January 8, Korea is currently showing some external soundness in terms of net foreign credit, repayment capabilities, and foreign currency fund-related conditions on the part of banks.

Internally, the soundness of the household and corporate sectors is unlikely to deteriorate in the near future as well, with the domestic economy showing positive signs. Still, economists point out that companies in vulnerable sectors including shipping, construction, and shipbuilding need to be monitored on an ongoing basis, as the recession in these sectors is lingering.

“The financial authorities will keep a close eye on the situations, while adjusting policy directions through macroeconomic policy meetings or the like, so as to cope with market instabilities in advance,” said Kim Yong-beom, head of the bureau.

Low-income households are forecast to face ongoing difficulties in the local financial sector, and the polarization of the corporate bond market, which is exacerbated these days, is likely to pose a burden on the entire corporate financing market. In the household sector, low-income borrowers are predicted to witness a higher repayment burden in the event of rising interest rates, which could result in a decrease in consumption spending to slow down the economic recovery.

In the meantime, financing conditions are expected to be adverse at least to some extent for less successful companies, because investors are increasingly focusing on short-term, riskfree assets. If the global interest rate goes up, more and more marginal companies may become insolvent mainly in the vulnerable sectors.

Also, the financial industry as a whole is expected to enjoy improved conditions this year, thanks to the economic recovery, but the recent trends of worse profitability and soundness could continue for the time being. The United States and many other advanced economies are accelerating their restoration, and the Eurozone has entered a recovery phase as well. Meanwhile, emerging regions such as China are exposed to greater downward risks due to cyclical and structural reasons, and their growth is gradually losing steam. Their weak economic fundamentals and political uncertainties have caused global funds to veer toward developed countries, too.

During the course, global financial uncertainties are likely to deepen with the direction of international capital flow changed in the wake of the decreased liquidity following the Fed’s tapering. “We need to be prepared for worse export conditions caused by the weak yen and the possibility of potential financial crises in emerging markets,” the director eplained, adding, “Also required is monitoring on whether or not foreign capital, which continued flowing into Korea throughout last year, will keep doing so this year.”

Major Tasks for 2014

At the same time, the local financial industry is expected to concentrate on globalization and innovation through competition with privatization and restructuring going on.

The Korea Institute of Finance published a report on January 5, introducing the key trends and long-term tasks associated with the local banking sector, companies, and related policy. According to the report, the privatization of Woori Financial Holdings is likely to speed up structural changes in the banking and investment sectors, while the restructuring of regional banks lead to greater competition among major banks and regional financial institutions.

The investment sector is predicted to face more rapid reorganization as well, because of the shrinkage of brokerage services and the disposal of subsidiaries. Additionally, financial industry reform is expected to revolve around consumer-oriented regulations. More integrated financial services allowing for each individual’s income, age, and family structure and combined with leisure, medical, and other non-financial needs are anticipated. Supervisory measures against consumer damage to and losses of financial consumers are to be shored up, too.

More efforts are required for business innovation and impact resistance. It is advised that financial companies make thorough preparations for corporate restructuring and proactive response to external conditions. For example, internal reserves should be beefed up along with a conservative stance on credit risks, while the ratio of the allowance for bad debts is stepped up.

Another consensus is that the leadership and public-centeredness have to be continued for a while in the field of policy financing. In this context, an increase in the financial demand of the working class, credit restoration of the marginalized class, and support for tech-oriented venture firms will have to be continued.