KCCI Announces Research on 'Improving Corporate Financing Challenges'
During the COVID-19 pandemic, the corporate funding market experienced significant volatility, with sharp rises followed by steep declines. Recently, with the long-term U.S. Treasury yields reaching their highest levels since the global financial crisis and external uncertainties prolonging, the need to revitalize capital markets such as bonds and stocks has been raised to ensure companies can secure stable funding.
On the 25th, the Korea Chamber of Commerce and Industry (KCCI) released research results titled “Improvement Tasks for Private Companies’ Funding Conditions and Capital Market Development.” According to the study, which analyzed the financial flow statistics published by the Bank of Korea based on the first half of each year, private companies (excluding public enterprises among non-financial corporations) raised 285.3 trillion KRW in the market in the first half of 2022 during the COVID-19 period, an increase of 217.4 trillion KRW compared to the first half of 2019 before the pandemic. The funding scale, which increased 4.2 times in three years, then decreased by 204.6 trillion KRW in just one year, returning to pre-pandemic levels at 80.7 trillion KRW in the first half of this year.
KCCI stated, “Although the total amount of funds raised by companies in the first half of this year appears to have returned to pre-pandemic levels, this was not a gradual decline but a hard landing within just one year, placing considerable burden on companies,” adding, “The expansion of volatility in the funding market can increase uncertainty in corporate management and lead to a contraction in business activities.”
The biggest contributor to the volatility in corporate funding was the change in borrowings from financial institutions. Bank loans and other financial institution borrowings increased from 57.0 trillion KRW in the first half of 2019 before COVID-19 to 120.5 trillion KRW (+63.5 trillion KRW) in the first half of 2022, then decreased sharply to 37.4 trillion KRW (-83.1 trillion KRW) in the first half of 2023.
Meanwhile, funding through stock issuance rose from 13.9 trillion KRW in the first half of 2019 to 27.4 trillion KRW (+13.5 trillion KRW) in the first half of 2022, then dropped to 12.7 trillion KRW (-14.7 trillion KRW) within a year. During the same period, corporate bond issuance fell from 12.4 trillion KRW to 1.9 trillion KRW (-10.5 trillion KRW) and then to -2 trillion KRW (-3.8 trillion KRW), respectively.
The report noted that since financial flows have seasonality, the analysis was based on first-half indicators.
South Korea’s Funding Market Highly Dependent on Indirect Finance... Acts as a Boomerang in High-Interest Periods
KCCI identified the vulnerability of South Korea’s direct finance market as the root cause of the large-scale reduction in corporate funding. During the pandemic, companies’ reliance on borrowings from financial institutions increased, while funding from direct finance markets such as stocks and bonds decreased. The problem is that the indirect finance market (financial institution borrowings + government loans) is structurally more affected by external shocks like interest rate hikes than the direct finance market (corporate bonds + stocks).
In fact, as the corporate bond market froze last year, not only small and medium-sized enterprises but also large corporations faced difficulties in raising funds and flocked to bank loan windows. With the rapid rise in the base interest rate, the interest burden ratio relative to corporate sales approached 1.5% in the second quarter of 2023, up from less than 1% a year earlier (second quarter of 2022).
Improvement Tasks Including Capital Market Deregulation and Expansion of Publicness of Pension Funds
KCCI proposed measures to ensure that capital markets support the real economy and serve as a stable funding source for companies, including ▲ deregulation of capital markets ▲ expansion of the publicness of pension funds ▲ codification of market stabilization organizations ▲ strengthening incentives for SLBs (Sustainability-Linked Bonds).
First, to broaden foreign investor participation in the stock market, it suggested easing foreign ownership restrictions currently applied to 33 stocks in specific industries such as electricity, broadcasting, and telecommunications. The proposal is to sequentially relax ownership limits starting with sectors that have a defensive effect on the economy, high foreign investment demand, and where foreign control can be effectively prevented.
Historically, South Korea’s foreign ownership restrictions have been a major obstacle to foreign participation in the Korean stock market. The MSCI (Morgan Stanley Capital International) developed market index, which internationally certifies whether a country’s securities market is at a developed level, flagged the foreign investment capacity in telecommunications stocks as an issue. As a result, South Korea’s inclusion in the developed market index was delayed in June this year. Global investment bank Goldman Sachs projected that if Korea were included in the MSCI developed market index, $44 billion (approximately 59 trillion KRW) of funds would flow in, and the KOSPI would rise by more than 30%.
Second, KCCI emphasized the need to raise the domestic stock investment ratio of public pension funds to the level of advanced countries. The National Pension Service’s domestic stock investment ratio was 14.6% as of the end of the second quarter of 2023, significantly lower than Japan’s Government Pension Investment Fund (GPIF) at 24.4% as of the first quarter of 2023. KCCI argued that while pension funds are increasing overseas asset allocations to enhance ‘profitability,’ they also need to uphold the ‘publicness’ principle, another important management guideline, to stabilize the domestic capital market.
Third, to revitalize the corporate bond market, a key pillar of the capital market, KCCI called for codifying the establishment and operation methods of financial market stabilization organizations.
During the 2008 global financial crisis and the recent pandemic, major countries established financial market stabilization organizations to strengthen capital market stability. South Korea also set up a 10 trillion KRW corporate liquidity support vehicle (SPV) in 2020, actively purchasing corporate bonds and commercial papers issued by non-financial companies, contributing to liquidity support in the real sector, easing corporate funding difficulties, and stabilizing market investor sentiment.
KCCI requested that when a liquidity crisis above a certain level occurs, the immediate establishment of market stabilization organizations, rapid large-scale fund contributions, and appropriate control of fund operations be manualized, and that legal guarantees be provided through legislation. In the U.S., the Federal Reserve Act stipulates the criteria for establishing financial market stabilization organizations, program operation methods, and post-reporting obligations to Congress, enabling faster responses during crises.
Fourth, KCCI advocated for the activation of the domestic market for Sustainability-Linked Bonds (SLBs), which have recently attracted attention overseas, proposing measures to strengthen incentives such as enhanced guarantees by the Korea Credit Guarantee Fund and Korea Technology Finance Corporation, and tax support for investors and issuers. SLBs are structured so that if issuers fail to meet pre-agreed environmental and social targets, they pay investors higher interest rates than initially promised, promoting voluntary ESG activities by companies. Despite the overall contraction of the global bond market last year, the SLB market grew by 21% compared to the previous year.
Kim Hyun-soo, head of the Economic Policy Team at KCCI, said, “In the current fierce global competition in advanced industries, corporate funds must be supplied stably for companies to establish more detailed management strategies,” adding, “It is necessary to lay the foundation for capital market growth so that companies can receive timely funding through the market.”
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