By Min Byung-hyun
Things have been looking up for the Korean economy. On Aug. 27, Moody’s upgraded Korea’s sovereign credit rating to Aa3. Soon after, Fitch Rating and S&P also raised their ratings to AA- and A+ respectively. This set of upgrades reflects Korea’s robust real economy, strong fiscal fundamentals and its resilience to external shocks, all of which points to the nation’s enhanced global standing. The country’s recent achievement takes on more significance given that many advanced economies are continuing to struggle with the aftermath of the financial crisis.
Indeed, Korea is faring relatively well. Korea’s government bonds are gaining more ground globally as one of the safest bonds in the world. And shares held by foreign investors account for more than 30 percent (needs checking) of Korea’s stock market, which is proof that Korea’s stock market is one of their key markets. As such, the world is looking at the Korean economy increasingly more positively, and foreign investors are now both willing and eager to invest in this dynamic economy.
However, Korea’s financial markets are still lagging behind those of other advanced countries. The financial industry accounts for just 6 percent of the country’s GDP, which is smaller in comparison to the United States and the United Kingdom. Global financial institutions in Korea are not conducting core financial services compared to their offices in leading financial centers such as New York and London, and Korean financial companies’ overseas expansion is also at a rudimentary stage.
Recognizing the need to foster the nation’s financial markets, the Korean government embarked on its financial hub initiative in the mid 2000s. The idea was that Korea needed a city to serve as a financial hub similar to Hong Kong and Singapore in order to truly advance its financial industry. In 2007, the Creation and Development of Financial Hubs Act was enacted, and, in the following year, Financial Hub Korea was set up in the Financial Supervisory Service (FSS) to promote Korea as an international financial center by attracting global financial companies, supporting overseas expansion of Korean financial companies and improving the financial business environment. Such efforts have paid off. The Global Financial Centers Index ranked Seoul the ninth most competitive city this year, a remarkable improvement from 35th in 2009.
A similar progress was seen at the recent 2012 Financial Hub Seoul Conference, which was jointly organized by the Seoul Metropolitan Government and FSS’s Financial Hub Korea. The conference held in Hong Kong brought together more than 200 participants, a marked increase from an estimated 80 participants at the first Financial Hub Conference held three years ago.
There was more than just an increase in the size of the turnout. At the conference, the participants showed increasing interest in the Korean financial markets, which have continually improved, and praised the leadership of the Korean government and financial authorities in keeping the financial markets safe and sound. They were also enthusiastic about Seoul’s endeavors to become Asia’s financial hub. But an important question was raised that is worth bearing in mind. “There are already leading financial centers in Asia such as Hong Kong, Singapore and Shanghai. How will Seoul differentiate itself from these cities?”
In order to compete with other leading international financial centers, Korea has improved its financial business environment and infrastructure, including the International Finance Centers in Yeoiudo in Seoul and Munhyun in Busan. An incentive program was also developed to attract foreign financial companies. Now, the next step for Korea’s financial industry would be adopting the “select and focus” strategy. If pulled off successfully, this could represent one of the greatest turning points for Korea’s financial industry.
So what to select and where to focus on then? First, the emphasis must be placed on turning weaknesses into strengths. Korea’s financial markets are still developing which implies greater growth potential and more business opportunities. Therefore, assuring profitable business opportunities of Korea’s sound financial markets will whet foreign investors’ appetite to invest in Korea; in fact, foreign financial firms are posting higher return on equity (ROE) compared to their Korean counterparts. The growing pension market will also appeal to foreign financial institutions.
Second, it is vital to make Korean financial companies more competitive. They should shift away from focusing solely on domestic markets toward competing on the global stage. In particular, relatively untapped Southeast Asian financial markets present great business opportunities for Korean firms.
The conditions are favorable both at home and abroad. Foreign investors’ perception of our markets is positive, and many of them are actually looking to make an investment in Korea. We shouldn’t miss this golden opportunity. If we just step up our efforts now, we can make the dream of creating Asia’s No. 1 financial hub here in Korea a reality.