A soft landing is needed for PFs without politics

Anxiety is building over project financing (PF) as property-backed borrowers struggle to meet obligations under a real estate market that is buckling under high interest rates and rising construction costs. The value of PF across the country had already exceeded 134 trillion won ($103 billion) as of September, with delinquency rate reaching 2.42 percent compared to the 0.55 percent rate recorded at the end of December 2020.

Rumors related to PF woes plagued the financial market last week. A mid-sized construction company with multiple PF-based projects in provincial regions had to deny speculation about a possible default. Apprehension over weakness in the construction sector is deepening.

The government is to blame for that uncertainty. Financial authorities are suspected of arranging rollovers for ailing builders so as not to cause upsets for the governing People Power Party (PPP) in the parliamentary election on April 10. A developer working to convert a hotel premise in the posh neighborhood of Cheongdam-dong in Gangnam district, southern Seoul, borrowed 464 billion won in bridge loans but failed to sign a main loan contract before the earlier loan matured in August. Financial authorities saved the redevelopment project, previously on the brink of being placed in an auction, after the Korean Federation of Community Credit Cooperatives (KFCC) — the primary lender of 180 billion of those won — agreed to extend the maturity to next May.

Authorities perhaps feared that the collapse of a property project in rich Gangnam neighborhood would send panic across the market. The move, however, is paradoxical for the financial regulator, as it is hampering with the restructuring of KFCC — which has suffered a bank run due to its heavy exposure to troubled PF.

The government tried to correct itself by emphasizing “orderly” restructuring. Financial Supervisory Service (FSS) Governor Lee Bok-hyun warned of filtering actions based on constructors’ self-restructuring and pain-sharing efforts. Extending a lifeline to troubled projects can end up breeding more trouble. Construction projects without promising business prospects must be dealt with according to the market order. Government support should be restricted to promising projects that can survive a temporary liquidity crisis.

Choi Sang-mok, a nominee for both deputy prime minister and finance minister, promised to pay utmost attention to steering a soft landing of property PFs in a written answer ahead of an upcoming confirmation hearing. While tending to a soft landing of the PF market in order not to trigger a financial shock, authorities must not make a political decision with less than four months to go before the general election. Balanced policy is essential in sensitive times like these.