IMF Official Advises Korea To Trust More in Markets

To cure persistent weakness in Korea's corporate sector, the International Monetary Fund's first deputy managing director, Stanley Fischer, called Monday for more aggressive reform with less government involvement and more market discipline.

The outgoing head economist of the Fund spoke to a group of academic and business leaders Monday in Seoul. His appearance was sponsored jointly by the Institute for Global Economics and the Fund's Seoul office.

Low profitability and excessive debt add up to a weak corporate sector that poses a risk to the economy and a danger to the stability of financial markets, Mr. Fischer said. Korea needs to move more aggressively to restructure the sector, he said, allowing companies with questionable viability to fail.

"The authorities should press ahead with the plan to stop underwriting the corporate bond market," Mr. Fischer said, referring to a program, scheduled to expire at the end of this year, of bond acquisition through the state-run Korea Development Bank.

The program in effect allows selected companies to repay just 20 percent of their maturing corporate bonds and defer the remaining portion, which is taken on through the bank's purchase of new bond issues. Some large corporations, including Hynix Semiconductor, Hyundai Engineering & Construction and Ssangyong Cement, have been selected for the program since the beginning of the year.

Mr. Fischer said that Korea must put more faith in the market. Referring to state ownership of the previously private commercial banks, Mr. Fischer said, "Getting government out of the banking sector is important to improve management and remove the conflict of interest in corporate restructuring." That move must be taken quickly without waiting for the sale prices to rise, he said. "The sale of Seoul Bank will be an important step." The government currently owns half of the largest banks, including Seoul, Hanvit and Chohung.

The downturn in the economy was inevitable, considering the necessary high-interest policy that enabled the sharp rebound from the 1997 financial crisis, Mr. Fischer said, and Korea continues to be affected by the slowdown in the global economy.

"Recovery and the actual growth rate will depend on external factors," he told reporters after his address. "The government's projection of 4 to 5 percent is on the high side." For that, fiscal policy should not be tightened as the government in effect has done, he said.

The supply of adequate and accurate information to the market is vital, he said, as was witnessed in the crisis. "The lack of information meant that investors reacted more violently than they otherwise would have done."

Not only must rules and regulations be up to international standards, he said, but it is essential that actual practices are also brought into line with international best practices. Quoting an estimate of 4,000 qualified auditors to 8,000 listed companies, he said, "Information available to investors and creditor banks is less accurate than it should be."

Responding to the business community's complaint that the proposed class-action system can put an adverse burden on the sector, Mr. Fischer said, "There is a long way to go before you have to worry about that." He said the focus of the system lies on enforcing shareholder rights, offering much better outcomes for the whole.

by Kim Young-sae