Economic Survey of Korea 2005: Reform of the corporate and financial sectors

 

The following OECD assessment and recommendations summarise Chapter 6 of the Economic Survey of Korea 2005 published on 5 October 2005.

The trend toward better corporate governance should continue …

Rapid structural change in the corporate sector requires improved corporate governance as well as greater labour market flexibility. There has been marked progress among the remaining chaebol, which have reduced their debt-equity ratios below 100%. However, there appears to be a reluctance to invest despite abundant cash holdings. To some extent, this more cautious behaviour is the desirable outcome of better corporate governance practices and the desire to increase financial soundness. It is important to make further progress in improving corporate governance, enhancing transparency and ensuring that the market for corporate control is open to both domestic and foreign participants. With further progress in this regard, the phasing out of the 25% shareholding ceiling imposed on more than 200 chaebol-affiliated firms would be appropriate, which may have a beneficial impact on business activity. Finally, it is essential to remain open to foreign investment.

… while encouraging the restructuring of SMEs

In contrast to the large companies, the situation in SMEs has deteriorated. It is important to streamline the diverse programmes to support SMEs, which have made them dependent on the government. In addition, the increase in government guarantees on bank loans to SMEs, which amount to 6% of GDP, should be reversed. The government’s June 2005 plan to streamline programmes that support SMEs and to reduce government guarantees on bank loans to SMEs should be implemented. Banks should be encouraged to improve credit analysis in lending to SMEs. It is encouraging that the delinquency rate of SME lending fell from 2.3% in June 2004 to 2.1% a year later. However, the exposure of non-bank lending institutions to SMEs has boosted their non-performing loans (NPLs) and weakened their balance sheets. The Financial Supervisory Commission should remain vigilant in imposing prompt corrective action to limit potential problems in this sector. 

The performance of SMEs in Korea is relatively weak
2003


1. As per cent of sales.
Source: Kang (2005).

It is essential to resolve the delinquent borrower problem …

In contrast, the commercial banks have managed to increase their profitability and capital adequacy ratios, while reducing their NPL ratios. It is important to press ahead with the privatisation of the state-owned banks, which is boosting the foreign presence in the banking sector. While the banks appear to have overcome the aftermath of the credit card bubble, the large number of delinquent borrowers -- 3.6 million or nearly one-tenth of the working-age population -- continues to damp private consumption. Government policies that provide support for debtors without resolving the problem should be phased out, while avoiding additional schemes to help delinquent debtors in order to prevent moral hazard problems. Meanwhile, only a very small fraction of delinquents -- around 30 000 -- have used court-based personal bankruptcy procedures. The government should encourage the legal process to function actively, which requires increased resources for the judicial system. Discrimination against delinquent borrowers should be discouraged. Meanwhile, a new unified insolvency law, which is to be implemented in 2006, should be used to improve the exit mechanism in the corporate sector.

… while promoting the development of the capital market

Compared to the banking sector, developments in the capital markets have been less favourable in recent years despite the acceleration of financial-sector liberalisation and an opening to international capital flows. A vibrant and strong capital market is important to the development of venture business as well as to provide appropriate long-term saving instruments needed in the context of population ageing. Recent trends in the capital market are encouraging. It is important to promote the further development of the capital market through the issuance of government bonds with long-term maturity, limiting vulnerability to shocks and upgrading the financial infrastructure, including credit rating agencies.  

The size of the capital market has remained relatively constant in Korea during the past few years
As per cent of GDP

Source: Korea Exchange.

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Return to the Economic Survey of Korea 2005

A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

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For further information please contact the Korea Desk at the OECD Economics Department at webmaster@oecd.org.  The OECD Secretariat's report was prepared by Randall Jones, Yokoyama Tadashi and Yongchun Baek under the supervision of Wilhelm Leibfritz.

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