Download Structural Reforms in the Financial & Corporate Sectors Progress

KOREA
Structural Reforms
in the Financial & Corporate Sectors
Progress and Issues
Sri-Ram Aiyer
Country Director, Korea Department
East Asia & Pacific Region
The World Bank
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MAIN ELEMENTS OF KOREA’S
STRUCTURAL REFORM PROGRAM
• Establishment of a sound, market-based financial system
• Corporate sector reform to restructure corporate finances,
improve corporate governance, and enhance competition
• Reorienting the role of government from “dirigisme” to support
of private activity
• Improving labor market flexibility and strengthening social
safety nets
IN ORDER TO
• Strengthen market economy and provide impetus for efficient
allocation of scarce financial resources to high return activities
• Lay a new foundation for growth better attuned to today’s
economic imperatives, including globalization.
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FINANCIAL SECTOR REFORM
• Unified financial sector regulatory and supervisory body
established, and functioning with increasing autonomy
• Prudential regulations upgraded, forward looking criteria to be
adopted for loan classification
• Clear principles and processes adopted for use of public
resources in financial sector restructuring/recapitalization
• Established Korea Asset Management Company to manage
and quickly dispose financial sector assets acquired by
Government
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FINANCIAL SECTOR REFORM
• Speedy resolution of weak banks following diagnostic
audits, through closure/merger/gov’t acquisition
• Restrictions on foreign entry removed, two banks being
sold
• Resolution and restructuring strategy for non-bank
financial institutions adopted
• Upgrading of supervisory capacity and credit capacity of
banks to begin
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DEVELOPMENT OF CAPITAL MARKET
• Drastic liberalization of regulations on foreign participation
• Diversification and deepening of market through
encouragement of new institutional investors
(e.g. mutual funds) and asset securitization
• Strengthening of securities market infrastructure–
improvement of prudential rules, enhancement of market
competition, improvement of financial accounting and
disclosure, strengthening of market institutions
• Development of bond market, including standardization of
government bond issues and development of marketmakers’ network
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CORPORATE GOVERNANCE
• Strengthening of responsibilities, independence and
accountability of corporate boards
• Enhancement of minority shareholder and institutional
investor rights
• Enhancement of creditors’ rights through improvements in
bankruptcy laws and laws on secured lending
• Adoption of accounting, auditing and reporting standards
consistent with international best practice—for both
financial and non-financial corporations
• Enhancement of role of independent professional bodies in
standard-setting and regulation in accounting and auditing
• Introduction of audit committees of boards of directors
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COMPETITION POLICIES
• Strengthening of Fair Trade Act and its enforcement
• Commitment to fully enforce competition laws in the
restructuring of chaebols
• Tightening of rules against transactions between related
corporations and parties
• Institutional strengthening of Korea Fair Trade
Commission and increasing its sanctions powers
• Removal of restrictions on holding companies
• Major liberalization of foreign investment and M&A
regime, including allowing hostile takeovers
• Simplification of customs and certification procedures
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CORPORATE RESTRUCTURING
• Establishment of a framework for corporate debt workouts
led by creditor banks under guidelines established by FSC
and linked to financial sector restructuring
• Debt workout process supported by policies to:
– limit “emergency” loans
– reduce cross-guarantees
– limit concentration of credit
– facilitate debt-equity swaps, asset sales, and M&As
– remove tax disincentives
– tighten regulations on intra-chaebol transactions
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• Closure of insolvent, non-viable corporations
• Establishment of Capital Structure Improvement Plans for
implementation and monitoring of restructuring by top 5
chaebols
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THE PLUS SIDE
• Structural reforms including enacting of legislation
announced and pursued by Government with consistency
and clear commitment, despite difficult economic and
social conditions.
• Complemented by consistent macro economic policy
adjustments on fiscal and monetary side as economy
stabilized and external position strengthened significantly,
led by exports.
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THE PLUS SIDE (Cont’d)
• Led to restoration of confidence (e.g., Rating upgrades ) in
early 1999.
• Domestic demand has also picked up, another sign of
public confidence
• FDI and portfolio capital inflows registering record
increases
• Stock market booming
• GDP growth forecasts being adjusted upwards monthly by
Government and other analysts
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THE FRAGILE ELEMENTS
• Banks still holding large stocks of NPLs.
– Early 1999: Gov’t. KRW 100 tril. Market KRW 120 tril.
– May 1999: Gov’t. KRW 130 tril. Market KRW 160 tril.
• All crises show that NPLs are a moving target
• Forward looking criteria will require additional provisions
( est KRW 33 tril. while KAMCO / KDI have KRW 10 tril.
left )
• SME forced to restructure in 1998, due to credit crunch
• Most large chaebols (1-64) began restructuring in late
1998, with three of the top five unable to meet their end
1998 d/e target.
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THE FRAGILE ELEMENTS ( Cont’d)
• FSC announcement of creditor banks’ review of implementation
of restructuring plans showed 23 of 59 chaebols ( 6-64 )as
“unsatisfactory” or lower. Process so far has been of limited
scope ( dominance of smaller chaebol ), and limited
effectiveness ( financial or operational )
• Largest 30 firms account for 15 % GDP and 5 % of
employment, but over 45 % of total financial assets
Their loss making, unviable affiliates absorb scarce capital,
leaving little for high rate of return activities, including SMEs.
Exit is important to permit entry.
Best way to ensure high quality, sustainable recovery is to let
capital flow to investments with highest returns.
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THE FRAGILE ELEMENTS (Cont’d)
• How to speed up introduction of modern credit culture?
( e.g. quick sale of two banks )
• The NBFI sector - KRW 543 tril. at end 98, or 130 % of
GDP, compared with KRW 577 tril. or 137 % of GDP in
banking system- is excessively short-term oriented and
held by chaebols through ownership and management
controls. Are their allocation processes transparent?
• Are corporate governance reforms being adopted
uniformly? Is there enough transparency in most firms?
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THE FRAGILE ELEMENTS (Cont’d)
• Is disposal of KAMCO assets proceeding quickly enough
to complete “resolution”?
• Is access to credit the only impediment for SME
development?
• Alongside high unemployment, urban poverty has doubled
since the crisis - Beside the safety net, is there any remedy
other than high growth?
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THE CRISIS ABATES
• Last year’s concerns
How far will Korea’s GDP fall?
When will the recovery commence?
• This year’s concerns
The recovery is underway in Korea, and the rest of Asia
( e.g., Japan )
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GDP growth in East Asia
15.0
10.0
Percent
5.0
0.0
-5.0
-10.0
-15.0
1996
1997
1998
1999
Indonesia
Korea
Malaysia
Philippines
Thailand
China
Vietnam
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2000
TO SUM UP
• Are the underlying issues in the real economy solved in
Korea?
– Not yet. Took years in US.
• Is Korea’s recovery of high quality and sustainable?
– With continued restructuring and reform, especially in
corporate and financial sectors, and changes in behavior
(governance / transparency, competition / anticollusion, value-addition ),
– it can be sustained, given the track record, human
capital base and the President’s visionary leadership;
and
– Korea could then become a leading influence in Asia
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