IMF Staff Country Reports

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

September 18, 2020

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Republic of Korea: Financial Sector Assessment Program-Technical Note-Non-Financial Balance Sheet Vulnerabilities and Risks to Financial Stability, (USA: International Monetary Fund, 2020) accessed October 12, 2024

Summary

Non-Financial Corporate Sector. 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. As a result, despite the low interest rate environment, around one-quarter of total corporate debt (around 28 percent of GDP) is registered ‘at-risk’. Banks balance sheets are at risk as over half of non-financial corporate debt-at-risk resides with SMEs; Stress tests show that (i) Korean firms which are more indebted, less profitable, smaller and have lower turnover are more likely to experience difficulties servicing their debt; (ii) 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 and; (iii) exchange rate shocks appear manageable given low FX debt and natural FX hedges. 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.

Subject: 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

Publication Details

  • Pages:

    49

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Country Report No. 2020/278

  • Stock No:

    1KOREA2020005

  • ISBN:

    9781513557045

  • ISSN:

    1934-7685