Republic of Korea: Financial Sector Assessment Program-Technical Note-Non-Financial Balance Sheet Vulnerabilities and Risks to Financial Stability

IMF Staff Country Reports, September 18, 2020

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Non-financial corporate leverage as share of GDP in Korea remains higher than peer countries but has remained stable since 2013 at around 100 percent of GDP.
The stock of non-corporate debt has become slightly more resilient due to the deleveraging of non-conglomerate affiliated firms.
Average firm performance has remained resilient for conglomerate-affiliated corporates but weakened for all other firms.
Despite the low interest rate environment, around one-quarter of total corporate debt (around 28 percent of GDP) is registered ‘at-risk’.
Over half of non-financial corporate debt-at-risk resides with SMEs, posing risks to banks' balance sheets.

Characteristics associated with higher likelihood of debt-servicing difficulties:
- firms which are more indebted,
- less profitable firms,
- smaller firms,
- firms with lower turnover.
Interest rate and profit shock scenario:
- Corporate balance sheets are vulnerable to a sudden hike in interest rates, which combined with a profit shock, could double the amount of debt-at-risk held by non-SME firms.
Exchange rate shocks:
- Exchange rate shocks appear manageable given low FX debt and natural FX hedges.
Quantified stress outcomes:
- Under a downside macro-financial stress test scenario, non-SME credit losses would total a touch over 2 percent of GDP.
- Bank stress tests suggest that the maximum cumulative bank losses from distressed SME loans in a stress scenario would total around 2 percent of GDP.
- Together, these losses would be broadly manageable for the financial system to absorb.

Leverage: around 100 percent of GDP (non-financial corporate leverage, stable since 2013).
Debt-at-risk: around one-quarter of total corporate debt (around 28 percent of GDP).
Non-SME credit losses in downside stress: a touch over 2 percent of GDP.
Maximum cumulative bank losses from distressed SME loans in stress: around 2 percent of GDP.

Subjects: Debt service, External debt, Financial sector policy and analysis, Financial statements, Housing prices, National accounts, Personal income, Prices, Public financial management (PFM), Stress testing
Keywords: capital structure, CR, Debt service, Financial statements, Global, household balance sheet resilience, household balance sheet vulnerability, household balance sheets, household debt, Housing prices, ISCR, leverage ratio, market mis-valuation, Personal income, return on assets, Stress testing

Republic of Korea: Financial Sector Assessment Program-Technical Note-Non-Financial Balance Sheet Vulnerabilities and Risks to Financial Stability