At a Goldman Sachs sponsored forum this Friday, Jin Nyum, deputy prime minister and minister of finance and economy for the Republic of Korea, made a public appeal to the Hong Kong investment community for its support, and to defend the government’s record on reform.
The government is aware that it has a massive public-relations problem with international investors. The government has been accused of backtracking on bank and corporate structure reforms by global investors, and has been constrained by political and labour opposition. These problems have been compounded by slowing growth due to a global economic slowdown that has reduced exports; and by a credit crunch late last year when sentiment plunged over the ability of key corporates to pay maturing bonds.
Jin went to lengths to assure investors that the government’s reform efforts and corporate restructuring remain on track. “There is some concern that the government has changed its stance towards the top conglomerates in Korea and taken a softer approach,” Jin notes. “I assure you that we remain fully committed to chaebol restructuring principle.” He cites plans to implement additional regulations to enhance corporate transparency and accountability, such as phasing in class-action suits next year, requiring disclosure of consolidated financial statements and the introduction of peer review in accounting practices.
Jin also insisted that “The government is in no way involved in any of the [commercial] banks’ operations.” The administration has been criticized for alleged manipulation of the banks to do its bidding, in a continuation of traditional policies. Investors, for example, have pointed to allegations of pressure on Korea First Bank to reverse a decision not to roll over loans to the Korean Development Bank. Jin seemed to feel this was a misunderstanding based on the increased direct ownership of some banks by the government. “Government ownership in some banks is the result of recapitalization. We will sell our stakes in these banks as soon as market conditions permit,” he says. “With management autonomy guaranteed, the creditor banks make their own decisions based on commercial merit.”
Privately, government officials concede that the zeal for reform has slackened. They blame this largely on the loss of parliament to the opposition in the general election of April, 2000. Labour unrest added bottlenecks. They believe this year is crucial to getting reforms back on track, as 2001 is the only year without an election.
Jin notes the government has taken steps to mend fences with opposition parties, resulting in the recent Cheonan Forum, which is meant to have established a consensus for reform. “Cross-party support demonstrates that the reform process will continue,” Jin asserts. He also declares, “We have developed a more flexible labour market, reinforcing a labour culture based on law and order.”
Jin adds the government completed the groundwork for reforming market infrastructure last spring, and so corporate restructuring has been since left to the market. “With this change, reform may seem a little slow and at times uneven,” he says. But now the priority is not legislative change but trying to change attitudes and mindsets among Koreans. For example, the government wants to boost information technology workers, or force bank managers to rely on their own decisions about credit rather than be instructed by the Ministry of Finance and Economy how to lend.
Investors are currently worried about W36 trillion ($27.9 billion) of corporate debt – nearly a third of all outstanding corporate bonds – that matures in the second half of this year. They fear it will prompt another government bailout. This amount is 30% larger than the amount of bonds due last year, when trillions of won were pulled out of investment trust companies with corporate debt exposure, further hobbling companies’ ability to meet their obligations and forcing the government to intervene.
Jin side-stepped the question of whether he could rule out another intervention, but says he doubts it will be necessary. This year GDP growth is rising, not falling, and the equities market is in good shape.
Jin believes GDP growth in the second half can reach 5-6% “should the global economy begin to rebound”. First-quarter results have given the government a cautious optimism. “The slowdown seems to have moderated,” Jin says, noting the economy achieved a 3.7% growth in gross domestic product (GDP) in the first half of this year.
Korea relies, however, on export markets in Japan and America. The government has no clear idea of whether these markets will rebound. If they do not, Korea will have to rely on domestic consumption and investment to drive the economy. Government officials privately believe these are capable of carrying the economy forward, but worry that unless export markets revitalize, the domestic economy may have yet to hit bottom.
