International credit rating agency Standard & Poor's says that Korea must show further commitment to international best practice throughout the corporate, government and financial sectors if it is to achieve sustainable economic growth in the future.
Remarking on the long-established practices of reputation-based lending, of placing revenue growth ahead of profitability and lack of market transparency, S&P's managing director of corporate and government ratings for North Asia, Robert Richards, feels that, without change, Korea runs the risk of tarnishing its reputation with international investors.
"Without the establishment of strong best practices such as sound corporate governance, prudent financial management and risk-based lending practices, Korea will continue to be isolated from diversified, cost effective, long-term funding opportunities in the global capital markets," says Richards.
"Accurate assessments of credit risk are prerequisites for building efficient businesses; the disclosure standards at Korean companies however, are often substandard," adds Richards, warming to his theme. "Thus, the prospects for a revitalization of Korea's corporate sector will depend on the development of an environment in which risks can be known and can be priced fairly. Recalcitrants who believe that they can hang on to past practices are the greatest threat to future economic growth and stability."
Richards accepts that some companies have shown the necessary willingness to change, often making difficult decisions with regards to restructuring. Nonetheless, Richards feels that such readiness to change is not displayed throughout the Korean economy.
"Until best practices become the norm, rather than the exception, Korean companies will remain vulnerable to renewed debt or liquidity crisis," he argues. "For example, domestic lenders are deluding themselvesá- and increasing the risk of defaults - if they think that keeping most debt maturities relatively short is a substitute for proper credit analysis and appropriately matching debts with funding needs.
Richards' colleague, Dianne Lam, director of S&P's Asian structured finance team, sees securitization of assets as one means to improve business practice. Issuing collateralized bond obligations, deals backed by trade receivables amongst other asset classes, require firms to be more transparent in terms of providing information to investors.
"These deals, whether domestic or cross-border, have the potential to be very positive for Korean companies and for the local economy as well," she says. "Securitizations prompt corporations and banks to improve their data collection, risk management and loan servicing as well as investor reporting. In addition to increasing funding efficiency, measuring and quantifying portfolio performance should lead to increased financial and risk awareness at all levels in a corporation, and ultimately a return to profitability."
