Regional Focus

The Korean wave

Published: Sep 2013

With a population of just under 49 million, South Korea (officially the Republic of Korea) has a gross domestic product (GDP) of $1.155 trillion. Known as the ‘Miracle on the Han’, the country’s record-breaking industrialisation, technological achievement, education boom and rapid urbanisation turned it from one of the world’s poorest states to a global economic power – it was ranked the 15th largest economy in 2012, according to the International Monetary Fund (IMF).


The performance of South Korea’s economy is closely related to the performance of its exports, which contribute to almost 50% of its GDP. Major exports include:

  • High tech manufactured products such as semiconductors (9%).
  • Machinery (9%).
  • Automobiles (9%).
  • Ships (7%).

Overall South Korean exports dropped by 1.3% to $548 billion in 2012.

To promote inward foreign direct investment (FDI), the Korean government offers various incentives including cash grants and tax breaks. In addition, there are two types of foreign investment zones (FIZs) designated for foreign-invested small and medium-sized enterprises (SMEs) and large foreign-invested companies, respectively. The World Bank ranks South Korea eighth in the world for ease of doing business.


Following Japan’s surrender in 1945, which ended its occupation of the Korean peninsula, the Republic of Korea was established in the southern half of the Korean peninsula, with the Democratic People’s Republic of Korea (North Korea) under communist rule in the north. The two states established an armistice in 1953 following the Korean War. The country’s economic development was further halted by the ensuing US occupation (1945 to 1948) and the three-year Korean War, which destroyed around 60% of the country’s productive capabilities.

In 1953 the total industrial production of South Korea was estimated to be at a third of that in 1940, yet following significant political changes, South Korea experienced a strong economic recovery. The country experienced growth for 27 continuous years, beginning with its first five-year plan implemented in 1962.

The rapid economic progress during the Park Chung-hee regime resulted in a rise of per capita income to 17 times that of North Korea. South Korea ended its military rule in 1993 and Kim Young-sam became the country’s first civilian president. Today the country is a modern democracy. Previous president Lee Myung-bak, in office from 2008 to 2012, promoted his country’s role in global affairs, which was highlighted by South Korea’s hosting of the G20 Summit in 2010.

First female president

On 25th February 2013, Park Geun-hye became the 11th and current president. She is also the country’s first woman to hold this post.

Economic overview

Since the global financial crisis, South Korea has followed the international trend towards macro-prudential tools. At the Korea International Conference 2012, ‘Monetary and Macro-prudential Policies in the Aftermath of the Crisis’, Head of the Bank of Korea (BOK), Kim Choongsoo, stated:

“For emerging economies with highly liberalised capital accounts, it is of utmost importance from a macro-prudential perspective to guard against adverse shocks of external origin and associated capital flows. In this regard, Korea has recently implemented macro-prudential tools such as adjustable caps on banks’ foreign currency derivative positions and a macro-prudential levy on their foreign currency liabilities. I hope that Korea’s policy experience could be a good reference for other emerging countries.”

Recent developments

Recent economic policy developments include the government’s announcement in April of a KRW17.3 trillion ($15.3 billion) stimulus plan, which was an attempt to boost domestic consumption to offset the slowing demand for the country’s exports. This effort was considered to be the third-largest supplementary budget ever in South Korea, exceeded only by the efforts approved after the 1997/8 Asia financial crisis and the 2008 global financial turmoil.

In August, the BOK held its policy rate at 2.50% for the third consecutive month. The central bank was cautiously optimistic on growth, citing benefits from domestic stimulus measures. However, many analysts believe that the immediate economic outlook remains challenging, as demand at home and abroad remains weak. The BOK itself expects a negative output gap to be sustained for a considerable time, although it forecasts that the gap will gradually narrow.

Integrated into the global economy

South Korea is truly integrated into the global economy, and as such must be aware of external threats and opportunities. In a recent statement, the BOK outlined the potential influences:

“In terms of the future growth path, however, there are both upside risks, due for instance to the possibility of an acceleration in US and Japanese economic growth, and downside risks related for example to the possibility of an economic slowdown in China and to a heightening of uncertainties surrounding the exit strategy of the US Federal Reserve.”

In a separate statement on current economic developments, the central bank stated that consumption and investment was also increasing “helped by the base rate cut and the stimulus measures taken by the government”, and is expecting GDP to grow by 2.8% this year. Last year, South Korea’s economy expanded by 2%, the slowest rate in three years, because of weak global recovery and trade.

Regulation changes

Global banks operating in the country are being adversely affected by recent regulatory changes that let customers restructure their debts and forces banks to write off 30% to 40% of what they are owed, as well as the slowing domestic economic situation. Standard Chartered, for example, took a $1 billion write-down on its business in South Korea and is considering selling two consumer finance units, while HSBC announced in July that it will close its retail branch network, highlighting some of the difficulties such banks are experiencing.

Regional free trade

One effect of the 2008 global financial crisis was to pull East Asian countries together, for the region as a whole wasn’t as badly affected by the turmoil as the US or Europe. In particular, China, Japan and South Korea have been working together to liberalise trade and encourage economic co-operation across the region.

Free Trade Agreement

Over the past decade China and South Korea have worked towards a bilateral trade relationship. In 2003, China became South Korea’s largest trade partner, replacing the US. The trade volume between China and South Korea then reached $160 billion in 2007, some 32 times what it had been in 1992 when diplomatic ties were formally established between the two countries.

China has pressed to establish a Free Trade Agreement (FTA) with South Korea since 2006. However, South Korea hesitated, mainly due to fears that the low price of agricultural products in China would potentially hurt its domestic market. However, South Korea has looked more favourably at the idea following the global crisis. In October 2009, the Chinese Minister of Commerce, Chen Deming, and the South Korean Minister for Trade, Kim Jong-noon, signed an agreement to increase economic co-operation between the two countries.

China/South Korea relationship

Currently, South Korea holds a relative advantage over China in that it has more skilled labourers, however this may be at risk due to the recent downward trend in the South Korean population (similar to, but not as severe as, the problems faced by Japan’s shrinking population). Additionally, as China catches up in technology and research development this will further lessen South Korea’s advantage. China is firmly focused on creating an educated and highly skilled workforce, with many Chinese students encouraged to spend time at the best international institutions before returning to strengthen their country’s economy.

In addition to the China-South Korea relationship, there are strong ties developing across all East Asian countries post-economic crisis. In 2009, the six major trading partners of the Association of South-East Asian Nations (ASEAN) –

  • China.
  • Japan.
  • South Korea.
  • India.
  • Australia.
  • New Zealand.

– affirmed their commitment to establishing an East Asian Free Trade Agreement (EAFTA) and Comprehensive Economic Partnership in East Asia (CEPEA) within the next 15 years. If this is to occur, the EAFTA would create the world’s largest economic region, ahead of the US and EU, with its countries’ total population of three billion people (49% of the world’s population).


More recently, China and South Korea have invited Japan to join a tripartite FTA discussion. Negotiations on the agreement were set in motion in May 2012, with the first official talks on the matter held in Seoul from 26th–28th March 2013. The second round of talks kicked off in Shanghai on 30th July and focused on proposals to remove substantive tariffs, and address areas relating to services and competition. It also touched on issues regarding intellectual property and e-business. However, this meeting followed the 24th June reduction in the currency swap agreement between Japan and South Korea to its lowest level since 2006, amid a deterioration in diplomatic relations.

It will likely take some time for these countries to come to any conclusive agreement framework. However, it is a sign of a core strengthening in the region which will encourage growth and investment further in South Korea with its impressive agreements with Europe, the US and at some stage in the future China and Japan.

Payments infrastructure

The payment and settlement system of Korea consists mainly of a large-value payment system, various retail payment systems, securities settlement systems and foreign exchange (FX) settlement systems. The main large-value payment system is the BOK Financial Wire Network (BOK-Wire+), which is a hybrid settlement system that began operating in April 2009. The new functionality helps to save participants’ settlement liquidity through such features as a continuous bilateral and multilateral offsetting mechanism.

Securities settlement system

Korea’s securities settlement system (SSS) has grown exponentially since its inception in 1975, with the average daily settlement volume reaching approximately KRW28 trillion last year. The Korea Securities Depository (KSD), together with the BOK and Korea Exchange (KRX), began revamping the SSS in 2009 and the new system was successfully implemented for equity (16th January) and bonds (20th February) in 2012. The new enhancements largely consist of: for equity, reorganisation of the stock exchange settlement and institutional settlement; and for bonds, reorganisation of the inter-dealer market and introduction of intraday repo.

Chart 1: GDP quarterly growth
Chart 1: GDP quarterly growth

Source: BOK

Additionally, in March this year, the Financial Services Commission (FSC) passed a revised bill on the Capital Markets Act that will allow the establishment of central counterparties (CCPs) for the clearing of over-the-counter (OTC) financial derivatives. Derivatives, such as interest rate swaps (IRS), are now forced to settle contracts through the registered CCPs, which is expected to reduce counterparty and systemic risk. The size of South Korea’s OTC derivatives market reached KRW6,904 trillion ($6.32 trillion) as of the end of 2011, around 100 times the size of listed derivatives market. The IRS market accounted for almost two-thirds of the total OTC products.

Treasury challenges

When operating in South Korea, corporate treasury problems will be slightly different depending on the corporate specifics. Large South Korean multinational companies (MNCs) who are expanding overseas, and particularly those entering emerging markets, will face different challenges compared with large global clients coming into the country.

Sunil Veetil, Head of Global Payments and Cash Management Korea at HSBC, explains:

“Corporates who are trying to move beyond South Korea and expand globally are facing multiple issues. One issue may be due to the fact that they are expanding very quickly and setting up manufacturing units in many emerging markets. These corporates are finding it difficult to manage such a large group from a treasury perspective. They need their banks to help them improve their visibility over cash to allow them to see what is happening in each one of these countries.”

As Veetil indicates, many South Korean MNCs are looking to establish manufacturing units abroad. China, Indonesia, Vietnam and India are the favoured destinations, chosen for their strong domestic potential, low labour costs and also as key locations to export products to the West. Some MNCs are also establishing production facilities in Egypt and Brazil: Egypt is used as a base from which to focus on Africa and the Middle East; whereas Brazil is a strong location for tapping into the Latin America markets. The US and Europe are also important locations, but for sales offices as opposed to production bases.

As they expand globally South Korean corporates are realising just how important efficient cash management is. As their success in other countries grows, so does the amount of cash being generated in different currencies. “In some countries, cash flows in and out are restricted by foreign exchange (FX) rules,” says Veetil. “This means a corporate can’t move the money out very easily; instead they have to wait for the end of the year to issue a dividend or instigate an intracompany loan. Some corporates have huge amounts of cash lying idle in some countries, which are not part of a global or regional cash pool so they are not able to use it efficiently. Trapped cash is a big issue.”

Currency volatility has been a main issue for corporate treasurers operating in a country so heavily dependent on exports. According to data compiled by the Samsung Economic Research Institute (SERI), the South Korean won has been the most volatile among Asian currencies over the past three years. The won’s volatility index came in at 10.4% from January 2010 to December 2012, well above the 5% average tallied for the ten major Asian currencies. The currency volatility spiked further in July, as concerns emerged over an early exit of US quantitative easing (QE).

Recently, the won has depreciated against both the US dollar and Japanese yen. This is a conscious government objective, as a weaker won boosts the price competitiveness of Korean-made goods in overseas markets. A stronger won makes Korean goods expensive on overseas markets and erodes exporters’ earnings.

FX risk is just one of many risks that companies face when moving into new countries. “As they expand into other countries, risk management becomes an issue in terms of operational and counterparty risk,” explains Veetil.

Treasury structures

Similar to the situation in Japan, South Korean corporates often want to retain a centralised and highly controlled structure, with headquarters having direct oversight over their country operations or regional operations. In addition, they are understandably hesitant to compromise on quality control. This makes it difficult for them to manage the various treasuries due to the costs and practicalities.

Establishing a regional treasury centre (RTC) or shared service centre (SSC) is not a widespread practice as yet, despite interest and engagement with the concept. According to Veetil: “Some of our clients have already set up RTCs in Asia, Europe and the US, for example, so they are moving in the right direction and are decentralising at least on a regional basis. A few have done it and others are asking about how they can do it. They understand the importance of control but also realise that they cannot have control over operations in more than 100 countries direct from Seoul.”

Of the primary countries that South Korean MNCs are investing in, the most important by far is China. Many corporates have set up RTCs that are entirely devoted to covering China, with Beijing being the location of choice.

MNCs who are trying to enter the South Korean market, on the other hand, have a different set of obstacles to overcome. There is a unique market practice in South Korea, Veetil explains. “Many MNCs entering South Korea already have high quality treasury frameworks in place and don’t want to increase the number of bank accounts they currently have. Yet within the country, standard market practice is to have an account with every bank where your customers have accounts. Therefore, MNCs may have to open six to eight bank accounts, which can become expensive. Visibility over cash also becomes an issue, as cash is lying about in all these different banks which can be a struggle to consolidate.”

Looking ahead

Many South Korean companies are taking advantage of the crisis to expand outside the country, particularly in terms of manufacturing. “The amount of manufacturing moving outside of South Korea has increased substantially and that trend will continue,” says Veetil. “They have cash and are willing to invest. Importantly, they are also willing to take risks and move into new markets in Africa, for example, which is proving to be a great opportunity for these companies. As they expand, both control and risk become important issues. Many are trying to reduce the number of counterparties that they deal with, which leads to another trend we are seeing: the move to more bank-agnostic connectivity, such as SWIFTNet.”

But South Korean companies will not adopt SWIFT overnight. The process of information gathering and decision-making is a slow one in many Asian countries, yet some are seriously considering SWIFT. Veetil says: “We are seeing more clients using SWIFTNet and implementing it very aggressively. Once the corporate community makes the decision to adopt SWIFT, the move will tend to be very uniform amongst South Korean companies.”

Geopolitical spats, as well as issues around currency volatility, will remain top of mind for many treasurers operating in South Korea in 2014. Aside from these two issues, Veetil’s bet is on technology as a hot topic for 2014. “We see increasing penetration on the mobile front. The smartphone penetration in South Korea is 80%-85%, which is amongst the highest in the world, but banking through a smartphone is only just picking up (currently up 10.2% in 2Q13 – valued at KRW1.35 trillion per day). From a technology perspective, this is a big area of opportunity for banks to take advantage of.”


Q&A with Brown Lee

Portrait of Brown Lee

Brown Lee

Account Director, Japan and Korea

Could you describe the SWIFT take-up in South Korea recently?

Since 2007, we have been introducing SWIFT to most of the large corporate groups in the country. Today, one of the largest corporates in South Korea has moved its many subsidiaries to SWIFT. This has demonstrated the value proposition of SWIFT to the group as a whole and encouraged greater adoption by other large South Korean corporates as well.

Every year, the number of corporates joining SWIFT has been increasing and our market awareness has also been rising. The main driver for joining SWIFT is to increase cash visibility for better transparency and lower total cost of ownership (TCO) among corporates doing business with their overseas entities. Most corporates see SWIFT as the best financial messaging services provider for cross-border transactions with one secure, standardised gateway to all banks.

Do you notice an acceleration in the rates of companies moving to SWIFTNet, and what do you anticipate for 2014?

Market awareness of SWIFT has increased among corporate treasurers and relevant players such as treasury and enterprise resource planning (ERP) consultants in South Korea. We expect more corporates will move to SWIFT in 2014 and beyond. However, we do not anticipate a dramatic uptake due to the lead time before decision-making. We believe that market awareness is the key to our success – so we will try to organise more customer events for sharing knowledge and providing up-to-date information, such as global industry trends and corporate case studies.

What do you think are South Korean corporates’ biggest issues/worries?

The South Korean economy is mainly export-driven, so many corporates have been expanding their businesses overseas, and for most the turnover from overseas is larger than from their domestic operations. This drives corporate CFOs and treasurers to look for similar payment and cash management processes, based on a single channel, as they have domestically. Such solutions offer better cash visibility and enable close monitoring.

One of the biggest concerns/worries for CFOs is how to achieve a day-to-day level of transparency over their overseas cash. Some corporates have tried different solutions offered by other vendors, but these solutions did not meet their business needs, mainly because they could only provide a limited level of cash visibility.

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