With standards, both business and ethical, being raised through the terms of new free trade agreements, South Korea now ranks eighth in the World Bank’s ‘Ease of doing business’ annual survey. Eleanor Hill discusses the opportunities for financiers.
For South Korea, the first half of 2013 has not been without its challenges. Since the beginning of the year, Japanese prime minister Shinzo Abe has been unveiling policies to revive his country’s ailing economy by weakening the yen – a serious threat to Korea’s export competitiveness. Then, in late-March and into early-April, cross-border relations came under severe pressure, with North Korea issuing nuclear missile threats. Although these tensions were initially diffused and North Korea dialled down its rhetoric, government-level inter-Korean talks have since failed to take place and North Korea recently renewed its nuclear threat against South Korea and the US.
Despite these headwinds, the latest trade figures from South Korea suggest that the country is very much holding its own. Indeed, despite an almost 20% weakening in the yen from its lowest point in 2012, South Korea’s trade surplus rose to US$6.03bn in May 2013. According to data from the ministry of trade, industry and energy (MOTIE), this is the highest surplus recorded since October 2010. What’s more, exports increased by 3.2% year-on-year to US$48.37bn, which was a huge improvement on the 0.9% decline forecast by analysts.
So what is the longer term outlook for South Korea’s trade landscape and what does this mean for trade finance in the country? “Trade is the main growth engine of the Korean economy. It accounted for 80% of GDP in 2011 and 92% in 2012,” says Quang Buu Huynh, head of Asia Pacific international, global trade and receivables finance at HSBC. “Korean trade has been consistently growing year-on-year at double digit figures. In 2012, with a total import/export value of US$1.07tn, Korea replaced Italy as the eighth largest trading nation in the world,” adds Hyun Sook Son, HSBC’s head of global trade and receivables finance, Korea.
Shaping the landscape
Playing home to global corporate giants such as Samsung and LG, it is no surprise that South Korea’s main exports include high-end manufactured items such as semi-conductors and wireless telecommunications equipment. “But we are increasingly seeing the export of services such as construction and engineering, too,” says Quang.
And as Korean companies of all sizes continue to gain global market share – whether it be in the auto, technology, or shipping industries, “trade is only going to become more important for the Korean economy, as well as for the Korean banking sector”, says Mark Wuscher, head of GTS, Korea at Bank of America Merrill Lynch (BofAML).
At present, there is an interesting dynamic among banks active in the Korean trade finance landscape, as Wuscher goes on to explain: “The international banks are very active in certain areas of trade finance: first and foremost the commercial banker’s acceptance market, which supports the local Korean financial institutions with US dollar funding. They also extend support not only to the large Korean corporates, but also to the large multinational corporates who operate in South Korea.
“While the local banks also support the large local corporates, they focus heavily on the small and medium-sized enterprises, which are very reliant on trade. It’s a symbiotic relationship between the international and local banks.”
However, BJ Choi of Korea Trade Insurance Corporation (K-sure) tells GTR: “Funding from the Korean banks is limited compared to the multinational banks, as they still have lower credit ratings and thus, have to bear higher funding costs. As such, interest from Korean banks is higher when they extend project financing.”
Founded by the Korean government in 1992 to operate export and import insurance programmes for the purpose of facilitating global trade, K-sure now provides a range of financial support services for exporters and importers alike, but retains a primary focus on export credit insurance. The organisation is also extremely active in supporting sustainable growth in the trade sector. “We seek diverse financing sources from Japanese and Chinese banks, as well as Islamic finance, to help Korean exporters to secure stable funding as certain European banks have been reducing their lending commitments as a result of the crisis,” explains Choi.
Traditionally used to working independently, K-sure has also recently been collaborating with the Export Import Bank of Korea (Kexim) on a handful of landmark projects. One such initiative saw the provision of US$3bn for the liquefied natural gas (LNG) production project, which Samsung Heavy Industries (SHI) and Daewoo Shipbuilding & Marine Engineering (DSME) are jointly participating in at Ichthys, Australia. The two state-run institutions are also currently collaborating on another LNG project at Sabine Pass in Louisiana, which will reportedly allow the US to export LNG for the first time in its history.
Raising the bar
Collaboration aside, there are a number of other interesting trends taking place in the Korean trade finance market. “Over the last 12 months, there has been a considerable change in the trade pricing market, but that has not curtailed the need for trade finance. In traditional trade, there is still an active flow of import and export letters of credit; and in the emerging trade space, we are seeing growing interest in receivables discounting, for example,” says BofAML’s Wuscher.
Additional trends highlighted by HSBC’s Hyun include the fact that more and more Korean companies have been looking for non-recourse financing solutions since Korea adopted International Financial Reporting Standards (IFRS) in 2011.
“One unique transactional structure we have recently seen in the market,” continues Hyun, “is the provision of finance against retention money in the heavy construction industry. This is an exciting development, and illustrative of innovation in the local market.”
An expanding reach
One area that cannot be overlooked when analysing South Korea’s future as a profitable trading nation is the government’s far-reaching efforts to put in place free trade agreements (FTAs). In recent years, FTAs have been established with major trading countries and regions, including Asean, the US and the EU. Negotiations are taking place to secure FTAs with Canada, Mexico and the Southern common market, Mercosur (Korea already has FTAs in place with Chile, Peru and Colombia). Talks are also under way with China and Japan to put a trilateral FTA in place, although Korea has its own separate talks with China running in parallel to this negotiation.
Increasing the number of FTAs will only continue to break down the barriers to trade, ensuring that Korea remains a globally significant trading nation. In addition to presenting an opportunity to providers of trade finance, these FTAs will also allow corporates to spread their wings – whether this be foreign businesses or local companies venturing into new markets.