TS Kwon is in a good mood. Asked whether he feels the Korean economy has bottomed out, he replies: "Yes, definitely. The most striking news is that the Federation of Korean Industries, the Korean Chamber and the Statistics Office all came out with a business survey index that showed a sharp upturn in confidence among businessmen and consumers. About 80% think our economy will pick up this year. The retail sales figures showed an upturn from December."
Kwon, who is Secretary to the President for Economic Policy, adds that the government now has better data for measuring the turnaround. "In January we developed a system that allows us to see - the very next day - total credit card spending. And we can see that credit card spending has increased a lot. There are also signs of capital goods imports, which shows businesses are making new investments."
As is well known, Korea's economy had been surviving on one engine - export growth - and so the revival of the consumer and domestic consumption as a second engine is particularly good news. GDP growth forecasts for the year are being revised up from 4% to around 4.5%.
Kwon says a central plank of the government's policy has been to revive consumer spending by partially focusing on those individuals who were credit delinquent - through the use of subsidies and reschedulings. About 1.3 million people have qualified for this form of benefit. "Our approach has let the poorer people spend more money," says Kwon.
He adds that it is not the government's intention to introduce moral hazard into the system. "Yes, it's their fault they are credit delinquent, but it is also the fault of the banks and financial institutions who didn't correctly assess their financial ability. For example, military service in Korea is compulsory and some banks gave soldiers credit cards even though they make around $50 a month. Before they joined the army they got the credit card, and then there was no way they could repay. So we arranged a delay in repayments for them until they finished their military service and could get a job."
He also points out improvements have been made to the financial system to ensure such a debacle is less likely to occur again. All of the major financial institutions have grouped together to form a national credit bureau. Kwon says this will be operational in the second half of the year and will radically improve credit assessment, and especially in the area of credit card approvals. One of the problems in the previous consumer credit boom was that banks were so keen to give out credit cards that some individuals had collected up to nine cards.
Similarly, a special SME credit bureau will be up and running in the second half too, he says.
Kwon says the government is keen to see further reforms in the financial sector and has a number of initiatives in place. Possibly, the most significant initiative is for the creation of the Korean Investment Corp (KIC) - an institution modeled on Singapore's GIC.
The KIC has been in gestation for quite a while, and Kwon has been one of its champions. In February legislation was passed that signed the KIC into law.
Kwon says that "We're now forming a team and within this year they may be able to start the business. Bank of Korea will transfer about $20 billion to the KIC, which will then run the money."
That $20 billion, which would previously have gone into US Treasuries, will be more actively managed. "The KIC's investment mandate has not been settled yet," says Kwon. "But broadly-speaking, there will be no real estate investment for the time being, but it will be able to invest in bonds, and stocks."
Most importantly, he adds: "The KIC can invest abroad as well as in Korea. The KIC will also outsource management of the funds. I believe around 80-90% of its funds will be run outside Korea by asset management companies that have representation in Korea. It's an incentive for foreign asset managers to have representation in Korea."
As part of the same process, Kwon says, "We wish to hire the first CEO from outside Korea."
The KIC is a key plank in the Korean government's effort to transform the local capital market. By bringing more asset management expertise to Korea, the hope is that a more vibrant risk culture can be fostered.
"Our President is saying that in Korea the problem is all the money is going into low risk, low return areas. But if we want to differentiate our economy we need to develop more venture capital, and new IT businesses.
"We need to develop a venture capital businesses. Then the newly established IT businesses do not have to go to the banks but can raise private equity, like in Silicon Valley."
Kwon notes that the creation of successful venture capital and private equity businesses is key to the country's future and that a new private equity law was passed recently.
"The problem such new businesses face is they can't borrow from Korean banks - which are too risk averse. So we need to develop a system, including a credit guarantee system, to divert money into the venture business and to small and medium enterprises.
"Plus as part of this we also need to develop our capital market. One way of doing that is bringing more foreign capital in and mobilizing idle money in the National Pension Fund and in insurance companies. All the changes currently taking place are all correlated towards achieving this goal."
Another part of this policy, he says, is to encourage a level playing field between local and foreign banks. He says the entry of Citibank and Standard Chartered via their respective acquisitions of Koram and Korea First has been good for the local banking system. But what of the widely reported fact that Citi and StanChart will have to create local boards of directors with Koreans and only those foreigners who actually live in Korea? This piece of news was widely interpreted as a backlash against foreign buying of Korean banks.
Kwon dismisses this and says it is not legally binding and foreigners should not be concerned. "Korea cannot go backwards. We should be equal to everyone - foreign and local businesses. Without that we will lose a lot of credibility and confidence and then we will lose everything."
He says of further bank consolidation: "There might be some more M&A, for example with KEB. The local banks are concerned about Citi and Standard Chartered and have become more competitive. They're thinking about good strategies and how they can compete with the foreign players."
He adds of Woori Financial, that the timing of its sale will depend on market conditions. "There is a strong will to sell the government stake as soon as possible," he says.
Meanwhile, although Kwon is bullish on Korea's growth, he also acknowledges that the country's prospects cannot be considered purely in isolation. He notes that imbalances in the global economy caused by the US's twin deficits are a subject of high-level discussion in Korea. "If you look at recent history since 1980, if any country's current account deficit is over 5% of GDP it cannot be maintained. But last year it went up to 6% in the US."
The world has two options. Either Asia, Japan, and Europe start importing more from the US, which he believes unlikely, or there is an exchange rate adjustment versus the dollar - which he says is gradually happening.
"It's not an easy task," he admits, "but our conclusion is that the US still has the highest productivity rate plus there is also an international mechanism for coordination of policy. So our conclusion is there will be no disaster but a gradual adjustment. Korea is prepared for this."
