News from RAM:
RAM Ratings notes that recent developments in the South Korean economy signal heightened risk metrics in the country’s banking system. We have been closely monitoring the impact of tight liquidity, the depreciating won and slowing domestic growth on the financial-services sector. Year to date, RAM Ratings has assigned ratings to bonds issued by Industrial Bank of Korea, National Agricultural Cooperative Federation and Hyundai Capital Services Inc, as well as the proposed bond issue by Standard Chartered First Bank Korea Limited.
“Our preliminary assessment shows that the issue ratings of these South Korean entities are still intact at the moment,” says Promod Dass, RAM Ratings’ Head of Financial Institutions. “We will be conducting a detailed review on these entities over the next few weeks. If the South Korean macroeconomic environment continues to deteriorate, the rating of these entities may be revised,” adds Dass.
The current global credit crisis has worsened foreign-currency liquidity in South Korea. Cross-border funding via the capital markets has been tough since the beginning of this year; foreign-currency financing accounted for about 10% of the South Korean banking system’s funding as of mid-2008. Additionally, South Korean banks’ high reliance on wholesale funding renders them more sensitive to interest-rate movements and susceptible to the risk of a sudden liquidity crunch.
The won has slumped to a 7½-year low against the US dollar of late, despite active intervention by the South Korean government to shore up the currency through its foreign reserves; the country’s foreign reserves amounted to USD239.7 billion as of September. A weakening won has heightened the threat of imported inflation, which will adversely affect major manufacturers. The broadening global downturn and weakening aggregate demand are expected to exert further pressure on the performance of South Korean exports - a key risk as much of the country’s growth is driven by export demand.
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