Greater Transparency Backs Korean Intent to Trim SOE Debt

Greater Transparency Backs Korean Intent to Trim SOE Debt

The FINANCIAL -- The Korean government's steps to heighten transparency of non-financial public sector debt validate Fitch ratings stance toward SOEs, says Fitch Ratings.


These measures clarify the level of the public sector debt, and convey official intent to improve its management and sustainability. The steps are largely neutral for the sovereign credit profile, but consistent with our reasons for upgrading the ratings of 12 Korean SOEs in July last year.

The latest public sector debt figure is comprehensive and more transparent. It accounts for both central and local government debt as well as the liabilities of other public sector entities - including both non-profit public institutions and non-financial state-owned enterprises. As a result, Korea's public sector debt stood at KRW821.1trn at end-2012, or 64.5% of GDP, according to Fitch Ratings.

The published aggregate public sector debt figure is broadly in line with Fitch's earlier estimates based on information from rated and other large SOEs whose financial data is publicly available. From a sovereign credit perspective, the focus of debt comparisons between sovereigns has been mainly at the general government level (i.e. local and central government debt), as the risks of broader public sector debt are more difficult to assess on a cross-country basis. One reason is that it is more difficult to obtain aggregate comparable public debt statistics.

Heightened transparency could help instill greater credit discipline if it results in better management of broader public sector liabilities. In this regard, the government reiterated its plans to stabilise public sector debt through the development of mid- to long-term plans for national, local, and public institutions' debt.

The government's approach to managing leverage in the broader public sector is consistent with our rating upgrades of 12 Korean SOEs in July 2013. We had refrained from a concomitant upgrade of SOEs at the time of the last sovereign ratings upgrade to 'AA-' in September 2012. This was because of the deterioration in the standalone credit profiles at most rated SOEs. The onset of broader SOE reforms began shortly after the Park administration took office in February 2013, and these adjustments prompted the upgrades across the sector.

Continuing measures to rein in the growth of SOE debt remain very much in evidence. They include allowance of tariff price increases (for KEPCO and KOGAS), higher private-sector participation in selective sectors (such as power generation), and a scaling back of overseas investment (for KOGAS and Korea National Oil Corporation). The government has also recently asked a few SOEs to divest some assets and pay down their debt by 2017.

Korea is only the fifth nation in the G20 group to announce a consolidated measure of public debt, and the recent measures are yet another reflection of the authorities' reasonable commitment to tackling the high level of SOE debt, according to Fitch Ratings.