High household debts and expected policy changes under a new Donald Trump administration are major systemic risks facing Korea's financial system, a poll by the central bank showed Thursday.

According to the survey of 78 financial and economic experts about risk factors for the financial system, 26.9 percent, the largest share, pointed to surging household debts and growing burdens of repayment as a No. 1 issue of concern.

One in five respondents, or 20.5 percent, cited potential changes in U.S. policy measures under Trump as a major risk factor, followed by 9 percent mentioning the impact of major economies' pursuit of industry policy that prioritizes national interests of their own.

The respondents also said weak domestic demand and difficulties of the self-employed and small businesses are feared to pose a threat to the domestic financial system.

The survey was conducted by the Bank of Korea earlier this month.

In the third quarter of 2024, household credit rose by the most in three years to stand at 1,913.8 trillion won ($1.37 trillion) on a marked increase in mortgage loans.

The figure logged the largest for any quarterly tally since 2002, when the BOK began compiling the relevant data.

Last month, the BOK lowered its benchmark interest rate by a quarter percentage point to 3.25 percent in a first monetary policy pivot in more than three years on easing inflation and sagging domestic demand.

But it remains cautious about monetary loosening amid concerns about rising home prices in Seoul and the surrounding area and household debts, officials have said. (Yonhap)

Source: Koreatimes

SEOUL – Global investors are watching if South Korea can make company boards more accountable to stockholders. Shares in the country tend to trade at lower valuations than their peers overseas, with analysts saying poor corporate governance is one factor behind what is known as the “Korea Discount.” President Yoon Suk Yeol has made fixing it a priority as he seeks to win favour with a growing base of retail investors. He is not the first leader to try, and he will need to overcome powerful business interests that have benefited from the status quo. 

What is the Korea Discount?

South Korea is home to major companies such as Samsung Electronics, one of the biggest makers of smartphones on the planet, and the Hyundai Motor Group, the world’s third-largest automaker. But investors often price them below their book value and lower than overseas rivals, such as Taiwan Semiconductor Manufacturing or Toyota Motor, even when they achieve a comparable level of profitability.

One explanation is the risk discount placed on South Korean assets because of the country’s standoff with nuclear-armed North Korea. More credible reasons can be found in the corporate structures that were pillars of the nation’s “miracle economy” but may now be holding it back. 

How did we get here?

South Korea’s decades-long transformation from economic minnow to industrial giant owes much to its sprawling, family-run conglomerates known as chaebols. These include LG, Hyundai, SK, Lotte and, largest of them all, Samsung. Now run by the second or third-generation descendants of their founders, the chaebols – meaning “wealth clique” in Korean – enjoy oversized influence and have often had cozy relationships with governments. This has led to a series of influence-peddling scandals.

There are now 64 conglomerates that fit the definition of a chaebol, according to South Korea’s Fair Trade Commission. The combined turnover of the five biggest chaebols is equal to about 45 per cent of South Korea’s gross domestic product as of 2022, according to estimates from the Citizens’ Coalition for Economic Justice, a South Korean activist group.

Chaebols exert control over hundreds of listed companies through a complicated web of cross-shareholding. Their founding families often control the boards and management of those listed firms. Critics say chaebol leaders seek to keep share prices artificially low to avoid the country’s inheritance tax, which is among the highest in the world. 

Why is the Korea Discount a problem?

The Korea Discount dampens economic growth by making it harder for companies to raise affordable capital close to home. Foreign investors are discouraged from holding Korean equities for the longer-term, preferring to flip in and out of stocks for quick gains, in part for fear of being penalised by corporate decisions that go against the interests of minority shareholders.

The relative absence of a large pool of long-term investors is often blamed for making Korean stock prices volatile. The Korea Discount is one reason why many South Koreans have avoided investing in stocks at home, preferring to put their money in real estate or US stocks. This deprives the country’s capital markets of wealth generated by rising disposable incomes.  

How big is the Korea Discount?

Take Samsung Electronics, South Korea’s most valuable company. The world’s largest maker of memory chips trades at slightly below its book value, whereas Taiwanese rival TSMC is worth more than five times the value of its balance sheet assets. If Samsung Electronics matched the price-to-book ratio of US rival Micron Technology, its valuation would be about double.

Overall, companies on the benchmark Korean Kospi share index trade roughly on par with their book value, while Taiwanese stocks change hands for about more than twice their book value. Korea Capital Market Institute researchers who studied the price-to-book ratio of listed companies in 45 countries found in a 2023 report that South Korea sat in 41st place due to weak shareholder returns, low profitability and poor growth prospects. 

What is the government doing about it?

It has been taking steps to improve access to capital markets for investors and revising systems and rules aimed at better protecting the rights of minority shareholders. One move was a “Corporate Value-Up Program” announced in late February for pushing listed companies to voluntarily improve shareholder returns and reform corporate governance in return for tax benefits. The plan has had mixed success so far. Investors are hoping the launch of the new Value-Up Index will spur inflows and give companies the incentive to follow the government’s initiative.

The South Korean program takes a cue from Japanese corporate reforms that helped to push stocks to multi-decade highs. South Korea’s financial regulator says the idea is to propel South Korean stocks higher over the coming decades. President Yoon has zeroed in on reducing the high inheritance taxes that give an incentive to controlling shareholders to keep a lid on stock prices. But the president’s plans to cut the tax took a blow when his conservative party suffered a setback in April elections for parliament. A progressive opposition bloc holds a majority in the body and has no plans reduce the levy.

How did Japan do it?

The chaebols are widely believed to have been influenced by Japan’s zaibatsu – both share the same Chinese characters and meaning. Like the chaebols, zaibatsu were family-controlled conglomerates that dominated Japan’s economy until they were disbanded by the US after World War II. While some Japanese companies have founding families in management, the practice is not as widespread as it is in South Korea. Japan’s corporate reforms began almost a decade ago when the government of Shinzo Abe introduced measures to prod managers to boost the valuations of their companies. At first, many did just the bare minimum to comply with the requirements, which included installing more outside directors on boards. The efforts eventually gained traction, and a tipping point arrived in 2023 when the Tokyo Stock Exchange asked companies to come up with capital efficiency plans, forcing many to turn lip service into action. The growing presence of activist investors in Japan has made chief executive officers more aware that they can lose their jobs if they keep ignoring the demands of investors.  

What are the next steps for South Korea?

The government will seek rule changes to protect the rights of minority shareholders against those of controlling shareholders who use mergers and acquisitions, as well as spinning off units, to advance their own interests. The main opposition Democratic Party, which controls parliament, vowed to pass the Commercial Act revision during this year’s regular parliamentary session. The measure is aimed at preventing power abuse by controlling shareholders.

What is a recent example of volatile shares?

Shares in Korea Zinc have been on a roller coaster ride due to a spat between the two wealthy families of the company’s two founders. They are battling over the future of the US$15 billion (S$20.14 billion) metals empire with the issuance of shares being used as a cudgel. The dispute has implications far beyond South Korea. Including affiliates, the company accounts for 12 per cent of the world’s zinc produced outside of China, according to Bloomberg analysis using data from consultancy CRU Group. 

The firm’s chairman in November said he would step down from his role as the head of the board after scrapping a planned US$1.8 billion share sale, a blow to his efforts to fend off a bid for control from the company’s largest shareholder. The dramatic turnaround came just weeks after Korea Zinc announced its planned share sale, prompting a sell-off in the stock and triggering an investigation by the country’s financial watchdog that put its corporate governance into the spotlight. 

Source: Straitstimes

[Today's Focus]

West Texas Intermediate (WTI), the US crude oil benchmark, is trading around $68.95 on Thursday. The WTI price trades flat as small US crude oil inventories built last week offset the escalating war between major oil producers Russia and Ukraine.The Energy Information Administration's (EIA) weekly report showed crude stocks rose last week, which weighs on the black gold price. Crude oil stockpiles in the United States for the week ending November 15 increased by 0.545 million barrels, compared to a rise of 2.089 million barrels in the previous week.

The market consensus estimated that stocks would increase by 0.400 million barrels. Weak Chinese demand contributes to the WTI’s downside as China is the world's largest crude importer. Data released earlier this week showed that China's crude oil demand fell -5.4% YoY in October.  Chinese demand growth is set to reach just 140,000 bpd this year, a tenth of the 1.4 million bpd demand growth of 2023, according to the IEA. On the other hand, the worries about the intensifying war between major oil producers Russia and Ukraine, and subsequent concern around potential oil supply disruption might boost the WTI price. On Tuesday, Russia’s defense ministry said that Ukraine hit a facility in the Bryansk region with six ATACAMS missiles. In response, Russian President Vladimir Putin lowered the threshold for a possible nuclear strike.

"These risks to supply are definitely keeping the support here and offsetting to a degree concerns around the global demand outlook," said John Kilduff, partner at Again Capital in New York.

WTI Oil FAQs

What is WTI Oil?

WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.

What factors drive the price of WTI Oil?

Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.

How does inventory data impact the price of WTI Oil

The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.

How does OPEC influence the price of WTI Oil?

OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.

Source: FXSTREET