Chairman Kim Byoung Hwan of the Financial Services Commission held a meeting with macroeconomic and financial market experts on August 5 to review financial risks in four specific sectors, which include debt risks in the household, real estate project finance, and small business sectors, and the soundness of the nonbanking sector, and discussed ways to effectively manage these risks. The following is a summary of Chairman Kim’s remarks at the meeting.
A Summary of Chairman’s Remarks
Current economic conditions at home and abroad appear to be reaching an inflection point, shown by recent monetary policy decisions in major economies, economic forecasts in the U.S., and domestic housing market situation. Against this backdrop, it is necessary to strengthen our efforts to examine and respond to market risks. While focusing our efforts to promptly and closely manage debt risks in four specific areas, which have been accumulated from the past, it is also essential to take steps to preemptively manage newly emerging risk factors.
As there exist concerns about the weakening of the U.S. economy, major stock markets around the world have tumbled recently. Therefore, it is also necessary to maintain close monitoring over volatility in stock markets.
The government is focused on working to bolster our stock market’s resilience and establish a more credible and reliable market environment for investors by seeking structural improvements over a medium- to long-term. To this end, the government will continue to make efforts to ensure seamless implementation of the Corporate Value-up Program and short sale reform measures. Along the same lines, the government will continue to work on tax support measures that can help to boost investments in the domestic stock market.
The relatively high levels of debt-to-GDP ratio and reliance on debt make domestic financial system vulnerable to external shocks. In order to ensure sustainable growth and make our economy more resilient and to guarantee stability in financial markets, it is essential to seek structural change and improvement away from the current debt-reliant model.
Tackling debt problems will require a sweeping and balanced approach, taking into account an array of related factors, such as the situation in housing market, conditions of small businesses, and the macroeconomic soundness of the overall economy. Resolving debt problems will not be easy in the short term. Therefore, the government will work for a soft-landing of the debt problems with a long-term perspective.
To this end, first, the government will work to ensure a consistent implementation of the various debt management mechanisms currently in place. These include (a) bolstering rules on debt service ratio (DSR), such as an expanded application of the stressed DSR rule, (b) ensuring consistent management of project finance debt based on strict assessments on the viability of development projects, (c) providing small businesses with effective debt restructuring assistance, and (d) strengthening nonbanking sector’s loss absorbing capacity through prudential management measures.
Second, the government will swiftly work to introduce measures that will help to make a transition away from the current debt-reliant model to an equity-centered approach. Key measures include the following—(a) continuing to promote capital market reform measures, such as the Corporate Value-up Program and other regulatory reform initiatives to help companies boost their valuations, (b) seeking bold reforms in the financing structure of the property market, which has been heavily reliant on debt, and (c) upgrading the role of policy financial institutions to remove redundancy with that of private lenders and to facilitate crowding-in of venture capital from the private sector.
The government’s debt management measures are not intended to control the total volume of debt below a certain level in absolute quantity. The aim is to stably manage the size of debt at a level deemed to be appropriate and commensurate with that of the real economy. To help resolve some of the difficulties that may arise in the course of implementing debt management measures, the government will make sure to provide support for debt restructuring and recovery and continue to supply microfinance assistance in close cooperation with the financial sector.
* Please refer to the attached PDF for details.