[Issue Interview] "Real Estate PF Risk is 'Ongoing'... Restructuring Inevitable"

Professor Park Sun-young of Dongguk University
Monitoring Needed for Guarantee Defaults in Small and Medium Construction and Securities Firms
Less Fiscal and Monetary Policy Capacity Than During 2011 Crisis

Professor Sunyoung Park, Department of Economics, Dongguk University. Photo by Younghan Heo younghan@

[Asia Economy Reporter Seo So-jeong] "This year, the Korean economy faces the most important challenges both externally, with the global economic recession, and internally, with the restructuring of real estate project financing (PF)."

Professor Park Sun-young of Dongguk University's Department of Economics stated in an interview with Asia Economy, "This year will mark the first year of orderly restructuring of construction companies and financial institutions due to the real estate market downturn." Professor Park, whom we met on the 17th at the Social Sciences Building research office of Dongguk University, is an economist who actively warned of risks and called for strong government policy enforcement when uncontrollable fear spread during last year's Legoland-triggered funding market freeze.

At that time, Professor Park raised the possibility of a chain collapse of construction companies and financial institutions entangled with real estate PF asset-backed commercial paper (ABCP), urging policy authorities to monitor with the determination to conduct a full survey of all domestic real estate PFs, drawing attention. Professor Park graduated top of her class from Seoul National University's Department of Economics in 2004 and earned her master's and doctoral degrees in economics from Yale University. Her major is 'Banking.' She has served as a professor in the Department of Industrial and Systems Engineering at KAIST, a research fellow at the Capital Market Institute, an administrative officer at the Office of Economic Policy Secretary in the Blue House, and has been a professor at Dongguk University's Department of Economics since 2020.

The Dunchon Jugong project association in Gangdong-gu, which was the first test bed to gauge real estate PF risk this year, has secured PF project funds amounting to 750 billion KRW through government support, providing some relief. Professor Park said, "In the case of Dunchon Jugong, it is a representative product with relatively low risk among nationwide projects, located in the metropolitan area and residential use," adding, "Given the existence of various products such as local and commercial ones, the success or failure of Dunchon Jugong is inevitably a matter of interest."

Although the contract rate of winners in Dunchon Jugong, considered a 'barometer' of this year's subscription market, performed relatively well, overcoming the crisis, Professor Park pointed out that real estate PF risk is still 'ongoing.' She explained that unless there are sudden changes in the external environment such as continued U.S. tightening and the Russia-Ukraine war, liquidity risk will spread to credit risk, making a 2011-style restructuring inevitable. The 2011 savings bank crisis also began after the base interest rate was raised five times to curb inflation, causing bridge loans, the precursor to PF, to become insolvent due to high interest rates. Professor Park predicted, "Small and medium-sized construction companies, small and medium-sized securities firms with real estate PF guarantee exposure, and credit finance companies will face worsening insolvency." She particularly pointed out that small and medium-sized securities firms generally have a large proportion of mezzanine exposure and a significant share of bridge loans, necessitating monitoring of non-metropolitan projects with low sales rates and mezzanine exposure.

Accumulated Crisis Response Capability...Low Possibility of Financial System-wide Crisis

Professor Sunyoung Park, Department of Economics, Dongguk University. Photo by Younghan Heo younghan@

Professor Park mentioned the possibility of a recurrence of the 2011-style crisis and said that policy response might be more difficult now. She said, "In 2011, when the savings bank and construction company restructuring crisis occurred, the U.S. had zero interest rates, but now both Korea and the U.S. have base interest rates 1 percentage point higher than Korea, so expansionary macroeconomic policies cannot be used," adding, "There is less room for fiscal and monetary policy than before." Professor Park also pointed out, "In 2011, China's economic growth rate was 9.6%, so Korea was hardly affected by the global financial crisis due to that influence, but last year China's growth rate was only 3%, and it is expected to remain in the 4% range this year, which poses difficulties for Korea, which has a high export dependence on China." She continued, "With the global economy in its third worst state ever, Korea's growth engine, exports, is faltering, and there are no external new growth drivers, which exacerbates difficulties," and added, "Korea's average age was 37 in 2008 but rapidly aged to 44.2 in 2022, making our economy larger and heavier and reducing resilience, which is also a problem."

However, Professor Park viewed positively that contingency plans have become operable due to accumulated countermeasures from the 2011 crisis experience. Having developed crisis response capabilities through several crises, she forecasted that the current real estate PF problem is relatively unlikely to escalate into a crisis across the entire financial system. She said, "I believe our government has been building crisis response capabilities through major experiences such as the 1997 foreign exchange crisis, the 2008 global financial crisis, and the COVID-19 crisis," but cautioned, "However, crisis response and policy response are different, so while responding to the real estate PF crisis, we need to plan how to manage housing finance and development finance from a long-term perspective."

In particular, Professor Park defined this year as an 'era of industrial policy,' where the government's role becomes important and the protagonist shifts from companies to the state. She emphasized, "Industrial policy is a field where our country excels," and said, "'Companies and government are one team' is a slogan that can be well realized." She further stressed that the government should first implement various policies to induce a soft landing of the real estate market and actively pursue restructuring to prevent a Japan-style long-term recession. Additionally, since Korea's household debt ratio to GDP is 105%, the highest in the world, she urged comprehensive support for vulnerable borrowers and strengthened personal rehabilitation measures.