Less Talk, More Action Approach Needed
Government Should Act More Quickly to Mitigate Economic Downturn
By Lee Hyo-sik
The Korean government should accelerate its decision-making process to introduce a range of policy measures in a timely manner to help businesses and consumers better cope with the deepening global credit crunch and the worldwide economic downturn, according to an Australian financial expert.
In an interview with The Korea Times, John Walker, chairman of Macquarie Group Korea, also said economy-related government agencies need to cooperate better and implement more effective policies, stressing governing and opposition political parties should also set aside their differences and cooperate in a bipartisan spirit to ride out the greatest economic crisis the nation has faced since the 1997-98 Asian financial market debacle.
``The government policy approach in dealing with the ongoing crisis has been aggressive and is heading in a right direction. A 33 trillion won stimulus package, including additional fiscal spending and tax cuts, is a dynamic response. But there is also room for improvement,'' Walker said.
He said now is the time for the government to take a ``less talk and more action'' approach by facilitating its decision making process and boosting internal coordination among different departments to act more effectively and coherently.
``At the time of a crisis, it is more important than ever to respond swiftly in a consistent manner. Overall, the Korean economy is in a much better position, compared to the currency crisis a decade ago. Economic fundamentals are much stronger,'' the chairman stressed.
Walker said the nation has ample foreign exchange reserves and companies have a lower debt to equity ratio, meaning the world's 13th largest economy can now better weather outside shocks.
``Korea has over $200 billion in currency reserves and has singed multibillion-dollar currency swap arrangements with the U.S., Japan and China. Its corporate debt to equity ratio averages 100 percent, down from 400 percent 10 years ago. Korea is in a better shape than many other economies to cope with the ongoing global economic downturn,'' he stressed.
Walker then said businesses and consumers should also do their part in helping the nation overcome current economic difficulties.
``Companies should invest more rather than sit on a huge pool of cash to strengthen their competitiveness and generate jobs. Households also spend money more wisely to help boost the domestic demand,'' the chairman suggested.
Time for Outright Restructuring
Walker said now is the right time to overhaul Korea Inc. to make it stronger and more competitive, saying the fate of struggling builders and shipbuilders should be left to the market.
The government and creditor banks have recently tried to initiate an industry-wide restructuring program to help viable firms and let nonviable ones fail in a bid to minimize chain reaction bankruptcies on the economy. Other cash-strapped industries, including savings banks and petrochemicals, have been asking the government and the Bank of Korea for credit at cheaper costs.
``The government should not intervene too heavily in the marketplace. For struggling construction firms and shipbuilders, their reckless business expansion is the main culprit behind the current difficulties. If they are bailed out by taxpayers' money, it will create moral hazard and weaken Korea's competitiveness in the long run. The government should act cautiously and modestly in this respect,'' he stressed.
Walker also said the nation should accelerate its march toward a services-oriented economy from a manufacturing-dependent one and make an all-out effort to help the local financial industry improve its risk management and cut short-term borrowings from overseas.
He then suggested that Korea should reduce its dependence on dollars as means of settlement for international trade and financial tractions if it wants to help stabilize the volatile won-dollar rate.
``The world is U.S.-dollar centric, which is a major cause for the current global financial market turmoil. Also, China's failure to let its currency freely float worsened the extent of the crisis,'' the chairman said.
He said the dollar will remain as an international currency for the time being. But the world is moving away from the dollar regime and eventually, the global financial market will have more diversified international currency system, making the kind of financial mess that the world is experiencing unlikely in the future.
``For Korea, it should reduce short-term borrowings from abroad to stabilize the local foreign exchange market. The nation also need to expand the settlement of international trades in yuan, euro and yen to cut its dollar demand and curb upward pressure in the won-dollar rate,'' Walker noted.
Diversification Key to Financial Industry
Touching on the suggestion that Korea should impose a restriction on the capital movement in and out of the country to prevent the ongoing domestic financial market turmoil from happening again, Walker said Korean financial firms should diversify their business to better manage risks and cope with the current market difficulties.
``Restricting capital movements and backtracking from capital market liberalization would hamper the development of the local financial market. Instead, financial firms should diversify their business portfolios, rather than heavily relying on net-interest margins and commission-based businesses, to improve the bottom line and boost competitiveness,'' he suggested.
Walker said the financial market is strategically important to Korea, projecting the domestic market will become more mature and sophisticated if it manages to get through the current crisis.
``In this sense, the Capital Market Integration Act, which will go into effect next February, is crucial to the future of Korea's financial market. The problem has been that Koreans are not confident in investing here since the Asian financial crisis. It has created a vacuum.Foreigners came in and filled the gap, realizing greater profits,'' he stressed.
Walker then said the Act will educate investors better and encourage them to invest more in domestic assets, making larger returns.
``These days, many retail investors are suing banks and fund managers for investments losses amid the bearish market, insisting they were not properly warned of risks. But the Act will help educate investors and such disputes will not likely occur. It will also provide retail investors with more investment opportunities and help financial firms diversify their portfolios, making the domestic financial market more competitive,'' the chairman stressed.
Financial Hub Plan
To turn Korea into a financial center, the government needs to speed up the process, Walker stressed.
``Every country has such an ambition to transform itself into a financial center. Korea unfortunately does not have a strategic advantage, such as English as a first language. What differentiates Korea from other nations is to do things faster and more efficiently. But it requires a strong leadership,'' the chairman said.
He then highly praised President Lee Myung-bak and Seoul Mayor Oh Se-hoon, saying both have been working hard to make Korea a more business-friendly place.
``As part of the differentiation strategy, Korea could strive to become an asset management hub on the back of its ample liquidity, providing private banking services to retirees and the wealthy not only here, but also in other Asian nations. It also could become an exporter of financial techniques to emerging economies. The important thing is not to benchmark rivals because things that work there will not work here. Do things that others do not and act more quickly,'' he suggested.
Walker also said government departments should work together toward the common objective, adding it should improve the quality of life, as well as educational and residential environment.
``Korea should also privatize the stock exchange because if it continues to be under government control, the local capital market will be more regulated and its advancement will be lackluster. Besides, the market will be less attractive to foreigners. To make foreign companies come here and list shares, Korea needs an independent listed stock exchange like other advanced economies,'' Walker said, stressing Korea has a long way to go to meet the global standard.
The chairman also stressed that to develop the financial market and attract foreign investments, Korea needs to launch a full-scale publicity campaign and provide correct information to let the rest of the world know about it.
``The Korean government has not been good at communicating with foreign media and foreign investors. If I were in charge, I would set up a special group of people, including businessmen and foreign investors here, to promote commutation with the outside and improve Korea's image overseas,'' he said.
To nurture globally strong investment banks, the competitive financial market is a must, Walker said.
``Efficient investment banks are essential to the development of the Korean financial market. But the government cannot create them. Only the competitive market can create them,'' he said, criticizing the state-run Korea Development Bank's failed attempt to acquire now-defunct Lehman Brothers and the Korea's Investment Corp.'s stake investment in Morgan Stanley.
``Once again, the Capital Market Act is a key to fostering competition. The government should support the industry, not rule over it.
Within the next few years, globally competitive investment banks will emerge here,'' he projected.
Walker suggested the local investment banks diversify business portfolios and sources of funding. ``They should take advantage of the Capital Market Act, and exercise control prudently and increase risk management. They also need to establish a joint venture with foreign banks, educate their staff and hire non-Korean professionals,'' Walker stressed.
The chairman then said Macquarie could be a good example for domestic investment banks because its business is well diversified.
``We are one of only few investment banks that posted profits in the first half of the year. It shows our resilience with diversified portfolios of equities, bonds and alterative assets under the advanced risk management regime,'' Walker said.
Macquarie Group Korea, established in 2000, has grown from five employees to more than 400, engaging in 13 different businesses.
It is providing both locals and foreigners with a comprehensive range of services, including equity sales and research, equity capital markets, corporate finance, infrastructure funds management, property-related financial services, portfolio funds management, leasing and asset financing and brokering of commodity futures.