BOK warns of worsening financial stability

Korea’s financial stability has deteriorated over the past few months due to a mixture of domestic and global negative developments, the central bank said Thursday.

The Bank of Korea (BOK) issued a quarterly report on the financial stability measured by 20 indices including debt amount and their subsequent default risks, derivative products-related risks and exchange rate fluctuations.

Chief among the negatives are heightened volatility in the foreign exchange market triggered and prolonged by the drawn-out U.S.-China trade feud, further compounded by falling corporate margins, an inevitable consequences of the export-reliant economy.

The Financial Stability Index, an overall measure of the financial market risk, stood at 8.3 in August, surpassing the 8-point mark for the first time since early 2016.

On a scale of zero to 100, readings moving within a range of eight and 22 means the country is advised to take caution to avoid a possible financial crisis, while readings over 22 means the country has entered one.

Since 1996, out of eight instances whereby the index surpassed the 8-point mark, three had developed into a fullfledged crisis.

The index was 100 in January 1998 following the Asian financial crisis, 24.8 in January 2001 amid fallout from the dot-com bubble in the U.S. and 57 in December 2008 following the global financial crisis.

“The index surpassing the 8-point came amid weak consumer sentiment dampened by U.S.-China and Korea-Japan trade disputes and external uncertainties gripping holders and investors of financial assets,” a BOK official said at the press briefing.

“More focus should be put on the gradual increase of the index since March, rather than it having breached the 8-point mark,” he added.

The report said of 22,869 firms subject to outside audit, 3,236, or 14.2 percent, saw their interest rate coverage ratio fall below 1 in 2018.

Particularly risk-prone industries were eateries, 35.8 percent of which saw the ratio fall below 1, followed by shipbuilding (24 percent), real-estate rent business (22.9 percent), logistics (18.7 percent) and maritime transport (16.8 percent).

The ratio, used to assess the risk of lending to a firm, is calculated by dividing a company’s earnings before interest and taxes by the company’s interest expenses for the same period.

It is used to see how well a firm can pay the interest on an outstanding debt. A ratio of below 1 means a company’s operating profit was too small to even meet the interest payments.

Loans made out to the firms with below 1 was 107.9 trillion won ($89.2 billion) in 2018, up 7.8 trillion won from the year before.