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The 2012 guide toSe

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Sustainability within reach 2While global financial turmoil has left many of its neighbours struggling, South Korea has progressed remarkably well. And with a new series of sustainability measures in place, the country is well on track to meet its long-term objectives

Interview: Shinhan Bank CEO Jin Won Suh 5Shinhan Bank’s president and chief executive officer Jin Won Suh talks to Euromoney about the forward-looking strategies it has adopted to ‘meet the challenges of tomorrow’

Economists endorse robust Korean economy 7South Korea’s economic resilience in the face of the global downturn sees the country ranked in the top 30 safest countries globally in the Q2 2012 results from Euromoney’s Country Risk Survey (ECR), with an improved post-Lehman ranking. But economists continue to regard sudden capital outflows as a major risk to financial sector stability, while a string of recent corruption scandals has damaged the government’s reputation for transparency

Free Economic Zones – the future of northeast Asia 9Six free zones to be completed by the end of the decade aim to draw businesses from around the world to serve the dynamic northeast Asian market of 1.5 billion people

Shinhan’s steady rise as South Korea’s premier banking institution 11Last year Shinhan Bank recorded the best results in its 115-year history. It doesn’t intend to rest on its laurels

This guide is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge.

Euromoney Institutional Investor PLCNestor HousePlayhouse YardLondon EC4V 5EXTelephone: +44 20 7779 8888Facsimile: +44 20 7779 8739 / 8345

Chairman and editor-in-chief: Padraic FallonDirectors: Sir Patrick Sergeant, The Viscount Rothermere, Richard Ensor (managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Diane Alfano, Christopher Fordham, Jaime Gonzalez, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany

Editor: Philip AyersJournalist: Gregory CurleyPrinted in the United Kingdom by: Wyndeham Group

© Euromoney Institutional Investor PLC London 2012Euromoney is registered as a trademark in the United States and the United Kingdom.

Contents

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Sustainability within reachWhile global financial turmoil has left many of its neighbours struggling, South Korea has progressed remarkably well. And with a new series of sustainability measures in place, the country is well on track to meet its long-term objectives. Gregory Curley reports

One of the world’s poorest countries in the immediate aftermath of the Korean War (1950-53), South Korea is now flourishing as Asia’s fourth-largest export-driven powerhouse. Home to global giants like Samsung and Hyundai, the country’s rapid rise into affluence has made it the world’s 15th biggest economy and remains an economic model for suc-cess for developing nations.

With a population of roughly 50 million and a GDP in excess of $1.6 tril-lion as of 2011, Korea’s market growth has been exponential. The country is the world’s leading shipbuilder and fifth-largest car producer.

By the end of 2011, Korea was richer than the EU average, with a per capita GDP of $31,750, calculated on a basis of purchasing-power parity (PPP), compared with $31,550 for the EU. As of June last year, Korea became the world’s seventh largest holder of international reserves ($304 billion).

Korea’s relentless convergence to a higher standard of living has barely missed a beat. China’s dollar GDP per capita would have to grow by 7.5-8% a year for 20 years to reach the heights Korea has already scaled.

The country forged free trade agreements with the EU and the US in 2011 and 2012, respectively. As of June 2012, Korea has signed FTAs with 45 countries including ASEAN, the European Free Trade Association (EFTA), India and Peru, while FTA negotiations are under way with China. The economies of the countries with which Korea has signed FTAs account for 61% of the total global economy and are home to 36.2% of the world’s population.

Of the top seven countries that invest heavily in R&D, Korea is number one in terms of the ratio of R&D investment to GDP. A number of inter-national companies – including Google, IBM and Microsoft – have set up R&D centres in Korea.

Korea’s IT industry also shows little sign of losing momentum, reaching a production volume of $271.7 billion in 2011. The previous year, exports of semiconductors and display panels grew by 60%, a 36% increase from the same period a year earlier. Altogether, IT exports reached a record $156.6 billion in 2011, on the back of growing demand for smartphones, TVs and tablet PCs.

Further indication that Korea has escaped the brunt of global financial hardship is a series of lucrative partnerships that have forged long-term contracts in a number of industries.

Brazilian mining conglomerate Vale has ordered nearly $750 million worth of new vessels from Daewoo Shipbuilding & Marine Engineering Co. Korea Investment Corporation, the country’s $35 billion sovereign wealth fund, is seeking to invest in China’s stock and bond markets to diversify its investments away from US Treasuries. Samsung C&T Corpora-tion has also signed a $7 billion renewable energy deal with the Canadian

province of Ontario.

Yet, despite such full-fledged expansion, the country’s newly acquired economic clout has become somewhat overshadowed by its aging population, rising rate of inflation and heavy reliance on exports. To keep growing at such an impressive clip, Korea will need to rethink some of its long-term strategies.

To counter investor concern, the government introduced a new series of policies last year to strengthen the resilience of the economy, and pave the way for sustained and equitable growth. Amended measures include a strengthened social safety net and fiscal policies that address the economy’s long-term challenges, including those related to Korea’s aging population.

“Risks of weaker demand for Korean exports from advanced economies and spillover effects from financial and fiscal stresses in Europe are now somewhat more elevated,” the IMF reported. “As the country remains vulnerable to global shocks through trade and financial linkages, strengthening the country’s nontradables sector as a secondary engine of growth would reduce the economy’s vulnerability to external shocks substantially.”

Policy challenges for the near term fall on officials to ensure a soft land-ing through appropriate macroeconomic and macro-prudential policies, namely monetary tightening, greater two-way exchange rate flexibility and improving the overall transparency of the public sector.

Primed for growthSouth Korea has been regarded as a role model for its rapid economic development over the past five decades. Its main industries, their com-petitiveness bolstered by government support along with active export-driven growth strategies have served as driving forces for advancement.

This year’s OECD report indicates that Korea recovered faster and more vigorously from the 2008 global crisis than most OECD countries and enjoys low unemployment and low government debt. Growth slowed slightly in late 2011, reflecting the deterioration in the world economy, but it is projected at around 3.5% in 2012, thanks in part to continued momentum in China.

Despite the recent slowdown in world trade, Korea is projected to sustain growth of around 3.5% during 2012. Given future spending pressures, fiscal policy should target a balanced budget. However, if the global economy were to experience a serious downturn, Korea has the scope to respond with fiscal stimulus, given its strong fiscal position and monetary policy easing.

Inflation is expected to increase at a slower pace of between 3 and 3.5% in 2012-13. The IMF also reduced its world economic growth forecast for 2012 by 0.1 percentage point to 3.5%, and for 2013 by 0.2 percentage


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points, to 3.9%, based on the prediction that the eurozone debt situation will improve and that the US will avoid its fiscal cliff in 2013.

Both the government and the central bank, Bank of Korea (BOK), have been implementing price stabilization measures since January last year to address distribution bottlenecks and anti-competitive practices. The new measures will also manage moral suasion pressures on sticker prices and minimize the effects of imported inflation through a rise in the valu-ation of the won.

Fiscal policy shifted to spending restraint in 2010 to meet Korea’s target of a balanced budget by 2013. Combined with the cyclical rebound in revenue, the budget deficit narrowed sharply to 1.1% of GDP in 2010.

The BOK waited until the recovery was firmly in place before beginning to tighten monetary policy in the latter half of 2010, and has left the interest rate unchanged at 3.25% since July 2011, citing uncertainty about the world economy. Given that the country is entering a fourth year of expansion, monetary policy tightening is likely to resume once the economy overcomes the current period of uncertainty.

Growth has averaged almost 5% during the past three years, led by fiscal stimulus in the wake of the crisis and a sharp rise in exports. Exports were supported by strong demand from China and the depreciation of the won. The won has fallen 47% relative to the Japanese yen since 2007, which has had a major impact on trade, given that Korean and Japanese products compete in world markets. Buoyant export growth has helped restore business and consumer confidence.

Renewed concerns regarding the global crisis and slowing world trade have caused Korean domestic demand to fall in the final quarter of 2011. Still, Korea is projected to overcome the current soft patch, with growth picking up from 3.5% in 2012 to around 4.25% in 2013, close to the economy’s potential rate.

Assuming that the sovereign debt and banking sector problems in the euro are contained, world trade growth is projected to double from an annualized rate of 3.5% in the fourth quarter of 2011 to nearly 7% by late 2012. Under this scenario, Korean export growth would also acceler-ate, underpinned by a relatively weak won and continued double-digit import growth by China.

“Korea’s GDP grew a remarkable 6% in 2010, and an impressive 4% in

2011,” says Suhng Joon Cho, chief economist and market strategist for NH Investment & Securities. “Recovery was further aided by its dependence on China, its largest trading partner; Korea exports more to China relative to the size of its economy than anyone else, even Germany.”

Faster export growth, in turn, should promote investment and support employment gains and a pick-up in wage growth that will boost private consumption. Inflation is projected to slow towards 3%, given the recent moderation in growth.

Narrowing the gap requires greater competition in services and promot-ing the restructuring of small and medium-sized enterprises (SMEs), which play a key role in services, by removing obstacles inhibiting their expansion and streamlining public assistance to them.

Shift from exports to SMEsYet some believe the country’s economic strategy may have run its course. South Korea has essentially reached the level of wealth that it can attain by relying on exports to turn a rural economy into an industrial one. The question facing Korea today is whether or not it can sustain its newly acquired wealth. The country’s successful export-led development model may be hitting plateaus in growth and future potential. Korea would be vulnerable to such a downturn, given that exports account for more than half of GDP.

However, the export-led recovery failed to ignite a rebound in domestic demand. In contrast to the 33% increase in manufacturing output since the late 2008 trough, output in the service sector rose by only 9%, while construction stagnated.

Given that small and medium-sized enterprises (SMEs) account for rough-ly 80% of output and 90% of employment in services, the dichotomy between manufacturing and services has widened gaps between large and small firms, thereby contributing to inequality and dampening employment growth.

Yet, despite softening demand domestically and externally amid the deepening European debt crisis and weaker growth in China, South Korea is primed to ride out the storm.

“Korea has been prone to capital shocks during times of global financial stress similar to other emerging market countries, but it may be time to consider Korea through the lens of a developed economy,” says Steve Lackey, Asia-Pacific chairman for BNY Mellon. “Over the past year there have been some temporary wobbles in the won but, by and large, it has been pretty stable.”

The IMF feels Korea has handled the fallout from the eurozone crisis well so far, and its vulnerability to external risks is much smaller than in 2008, when the collapse of Lehman Brothers triggered a global financial crisis. Korea has built up a substantial amount of foreign exchange reserves, which the IMF said are adequate to cover the government’s short-term debt.

Moreover, with foreign banks increasing interest in Korean treasury bonds, this will mean more stable investors for the country.

“The Bank of Korea in a time of stress has kept rates steady, with a most recent bias to lower rates in the months ahead,” Lackey notes. “Economic growth has slowed to solid levels (3-3.5%) for a developed economy; this level should be sustainable given a far greater reliance on China and

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South East Asia versus Europe or the US.”

Stifling eurozone concernsThe austerity backlash in the 6 May Greek elections further rocked the shaky eurozone, causing jitters in global markets amid deepening doubts of whether Greece has a future in the single currency area.

Korean financial markets were not immune to the fallout. The won depre-ciated to 1,180 per US dollar in May from 1,130 at end-April and the main stock index, KOSPI, dropped to 1,843 from 1,982 over the same period.

Nevertheless, Korean financial market reactions to the latest develop-ments in the eurozone have been relatively subdued compared with the past two years of global gyrations. The Samsung Economic Research Institute (SERI) reports that major market indicators, including the won, stock prices, three-year government bond yields and credit default swap (CDS) premiums, have been more durable compared to when the eurozone crisis mushroomed in 2010, and in the summer of 2011 when the US suffered a sovereign credit rating downgrade and the eurozone debt woes worsened. SERI’s analysis covered 35 countries among OECD and G20 member states, with the focus on the foreign exchange, stock and bond markets.

Furthermore, Korea’s foreign exchange market has become more resil-ient. Amid heightened concerns that Greece may exit the euro system, the Korean won was relatively stable compared to other currencies. Be-tween May and June this year, the won depreciated 2.58% against the US dollar, while 23 other major currencies weakened 3.94% on average. The won volatility stood at 0.46%, the fifth best in terms of stability among 23 countries.

Additionally, Korea’s foreign exchange reserves have increased from $200 billion in late 2008 to $315 billion (28% of GDP) in early 2012, which will help protect the country against future crises and improve its sovereign creditworthiness. Reserves are now more than double Korea’s short-term foreign debt.

Korea has been one of the fastest-growing OECD countries, with real GDP rising more than 4% a year during the past decade. Rapid growth narrowed the per capita income gap with the US from 62% in 1991 to 36% in 2010.

One of the reasons Korea’s financial uncertainties have eased is relatively favourable economic fundamentals. The short-term external debt ratio, foreign exchange reserves and current account balance have all improved and the soundness of financial institutions has been enhanced. Foreign exchange reserves stood at $315.95 billion at end-March this year, sharply up from $239.67 billion at end-September 2008.

Within the same timeframe, the ratio of short-term external debt to foreign exchange reserves dropped from 79.1% to 43.1%. The BIS capital adequacy ratio of domestic banks climbed to 13.88% in March from 12.31% at the end of 2008. Since the financial authorities announced stiffer regulations on banks’ loan-to-deposit ratios, aimed at controlling liquidity risk, the ratio fell to 95.3% from 118% over the period.

Safe haven for investmentIn addition to improved economic fundamentals, Korea is one of the few countries that have seen its sovereign credit rating outlook upgraded in recent months. On 2 April this year, Moody’s Investors Service revised its ratings outlook for Korea to “positive” from “stable”, citing fiscal prudence,

an improving external financing position and decreasing bank-related risks as reasons. Of 34 OECD countries, only Korea and Turkey had their rating or outlook upgraded by Moody’s.

The government’s various financial policies have also helped to signifi-cant degree. Since the 2008 crisis, Korea’s financial authorities have im-plemented a set of measures to ease excess capital flows and to improve soundness of financial institutions.

In October 2010, a ceiling on currency forwards held by banks was introduced. In January 2011, the withholding of taxes on foreigners’ investment gains in government bonds was reinstated and, in August, the government introduced a levy on financial institutions’ foreign bor-rowing.

Meanwhile, in a bid to safeguard against any global crisis, the BOK signed currency swap agreements with major central banks. In addition to $56 billion and $60 billion deals with China and Japan, Korea, along with ASEAN, China and Japan, increased funding for the Chiang Mai Initiative, the multilateral currency swap agreement they reached in 2000.

Green innovationWith the Korean economy vulnerable to oil price hikes – it remains the world’s fifth largest importer – the government is making plans to increase incentives for energy saving facilities, while developing energy saving guidelines.

One of the goals of the Green Growth Strategy is to “attain energy inde-pendence”, which implies a fundamental transition in Korea’s economic structure, given that net imports accounted for 86% of total primary energy supply in 2009.

Green growth is sustainable growth that reduces greenhouse gas emis-sions and eases environmental degradation, and remains a paradigm for national development that focuses on creating new growth engines and jobs by using green technologies and clean energy.

Korea’s 2009-13 Five-Year-Plan contains roughly 600 projects and a total budget of 108.7 trillion won (10% of 2009 GDP). Investment in green industries through the venture capital market nearly doubled between 2009 and 2011, rising to around half of total venture capital investment.

Growth prospects depend as well on the success of the Green Growth Strategy in transforming Korea’s energy-intensive economy and imple-menting the “Low Carbon, Green Growth” vision. The priority is to intro-duce a price on carbon, primarily through an emissions trading scheme, supplemented by a carbon tax on small emitters.

The move would encourage green innovation and help achieve Korea’s 2020 objective of reducing its greenhouse gas emissions by 30% in a cost-effective manner.

Korea enacted the Low Carbon Law in 2010 to help it adapt to climate change and establish strategies for energy self-reliance: effective reduc-tion in greenhouse gas emissions, less reliance on oil, stronger energy self-reliance and better adaptation to climate change.

By creating new growth engines – green technologies, green industries, upgrading industrial infrastructure and creating a better environment for a greener economy – South Korea is on course to an improving quality of life and strengthening national status.


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Interview: Shinhan Bank CEO Jin Won SuhShinhan Bank’s president and chief executive officer Jin Won Suh talks to Euromoney about the forward-looking strategies it has adopted to ‘meet the challenges of tomorrow’

Q: Your goal is to make Shinhan one of the top 10 commercial banks in Asia and number one in Korea by 2015. Can you briefly outline your strategies for accomplishing this goal?The financial environment is changing rapidly owing to the prolongation of the global economic downturn and increased financial market uncer-tainty at home and abroad, coupled with the intensification of competi-tion and heightened calls for consumer protection and micro financing.

Given this outlook, Shinhan Bank has adopted ‘Hit the future’ as the thrust of its medium- and long-term business, by ‘breaking out from the present and advancing towards the future’. For 2012 we have followed the strategic objective of ‘sloughing off the past to meet the challenges of tomorrow’.

We feel that Shinhan Bank requires well-balanced qualitative growth and an unwavering and powerful crisis response capacity even in the worst of conjunctures. Consequently we are pursuing certain strategic initiatives and carrying out a number of challenging tasks.

Let me briefly run through them.

Firstly, in readiness for the future, so that we can achieve continued sus-tained growth, we are strengthening our business model for fresh growth by cultivating new markets, stepping up marketing in strategic areas, ensuring that smart finance and the wealth management (WM)/ corporate and investment banking (CIB) model become well rooted, and consolidat-ing this business model by activating smart finance and embodying our corporate culture of ‘compassionate finance’.

Secondly, in the drive for qualitative and substantive growth based on profitability, efficiency and differentiation, we are striving for a stable profit structure through the diversification of our business portfolio, mak-ing full use of Shinhan Financial Group’s networks, working to heighten organizational efficiency by the construction of an integrated head office business support framework and ensuring a well differentiated foundation for growth by consolidating our customer base in core markets.

Thirdly, we are strengthening our potential to respond to crises in the face of the mounting domestic and international economic uncertainty. This principally involves building a well-honed crisis response system, a drive to improve our asset soundness by, for example, more rigorous risk manage-ment of household lending and the forward-oriented management of customer risk by the rebalancing of customer assets and actively offering firms financial consulting.

Q: How do you set Shinhan Bank apart from its domestic peers in terms of private banking?

Shinhan Bank has launched Shinhan PWM as the new wealth manage-ment business model based on close cooperation between Shinhan Bank and Shinhan Investment Corp.

So far in South Korea regulations do not allow cross marketing through the delivery of asset management services by a bank and a securities company, which both remain independent entities, but in view of the co-location of the banking and securities arms, we are offering a distinctive solution through the PWM Center, at which both companies’ products and services can be delivered at the same place and time.

This is not all. Through the building of a proximity framework, there will be increased scope for the delivery of asset management services. Most do-mestic private banks suffer from poor customer access and low customer convenience because the operation of their private banking centres is limited to a certain geographic area. Shinhan Bank’s asset management service, however, with its private bankers can deliver at the PB Centre and at linked branches so that everyday business can be carried on at a nearby linked retail branch.

Lastly, we established the Investment Products & Services Group at the group level to provide professional integrated wealth management solu-tions.

Q: What are some of the key benefits Shinhan Bank offers for its clients?Shinhan Bank offers a full banking service both for individual finance and corporate finance. Recently we have put in place a Korean form of matrix organizational framework for the WM and CIB areas that draws on the resources of Shinhan Financial Group to deliver high customer value and cultivate future growth momentum.

On the basis of cooperation between the banking and the securities arms, individual customers have available products, investment expertise and tax expert services that bring together banking and securities, while corporate clients are offered a forward-looking risk management platform that delivers a wide range of fund-raising, fund operation and settlement services to meet changing market situations.

Q: Shinhan’s track records in management and strategy have been good compared to those of its domestic peers. The bank maintained relatively stable profitability and sound asset quality throughout the financial crisis at the end of 2008 and amid stress in the real estate and construction sectors. How will you ensure sustainability in the years to come?In the globalized business environment, we are moving to a new para-digm right across the board. It is innovation and a willingness to embrace


change that will set the most important conditions to become a leading bank in this new paradigm.

It is in this light that the bank has set its business course over the medium and long term as ‘Hit the future’, which carries the meaning of ‘breaking free from the present in order to advance towards the future’. We intend to provide a fundamentally different answer to the question of what con-stitutes a bank in terms of joint business with our customers, our social responsibilities as a corporate citizen, our business culture and employee values.

Rather than looking towards the fundamental restructuring of our point of view and way of doing business with our customers, we want to gener-ate differentiated customer value with customers and the bank both advancing together along the same path.

Nor do I think that we should stint our support so that those working for us can experience both prosperity and a sense of pride from a fresh recognition of employees’ values and the implementation of the tasks that are thereby generated.

In the fullness of time we must take on the mission and responsibilities of being a leading bank by successfully acting to benefit the public weal in terms of regional society and the global community in addition to tradi-tional stakeholders such as our customers, employees and shareholders.

Q: Despite Shinhan’s strong market position and good record of managing credit and well-diversified revenue structure, the bank’s relatively large exposure to construction and real estate/leasing businesses and potential pressure on asset quality from high household indebtedness are cause for concern. What key strategies do you have in place for overcoming this?Shinhan Bank has been able to enhance its capacity to respond pre-emptively to potential crises by securing its ability to raise funds at all times even in a crisis, having smoothly weathered a number of crises including the Asian currency crises, the 2003 credit card debacle and the 2008 global financial crisis.

In addition following on from the introduction of the Basel II standards in 2008, it has achieved improvement across the board in its risk manage-ment systems including acquiring consent for the use of its internal grading methodology.

A risk culture has been constructed that is bottom up and not top down in character, so that in the handling of loan applications the method followed through to the consideration of potential insolvency is one that naturally brings together and complements the organizational frame-work and the staff members involved.

Shinhan Bank is minded to bring about qualitative and substantiated growth by securing a stable profit base and raising the efficiency of the way in which it works on the basis of its particular and characteristic risk management framework.

Q: Despite South Korea’s strong growth prospects and few economic imbalances, do you think extensive leveraging of the private sector will put pressure on asset quality in the banking system if a sharp interest rate hike occurs in an inflationary environment?In the wake of the global financial crisis that struck in 2008 there was an

adjustment of household debt (a deleveraging of household balance sheets) in advanced countries, including the US and the UK, but in Korea we had a continual upward trend in household debt that brought us to the era of 1,000 trillion won in household debt. As economic activity has now slowed at home and abroad and the increase in household incomes has continued to falter, we are acutely aware that there is considerable cause for concern about household debt including the increase in multi-ple debtors at secondary financial institutions.

Nevertheless we could have severely restricted the potential for exces-sive lending in comparison to the value of the housing collateral or the size of income by introducing regulations such as LTV and DTI in home mortgage loans.

It is my considered opinion that there is not a high risk of housing loans turning sour or households defaulting on their debt because of wild fluc-tuations in house prices within a short space of time, as the government is undertaking comprehensive measures to bring about a soft landing for household debt and has already initiated a number of measures to revive housing market activity.

Q: Do you feel that the Korean banking industry is underpinned by strong domestic funding, counterbalanced by some reliance on foreign currency wholesale funding? What are some ways of overcoming this imbalance?The Korean economy, with its high degree of external dependence, is heavily exposed to exchange rate movements and this volatility does not make for an easy life for the domestic banking community. The eurozone debt crisis and the slowdown in global economic activity have now emerged as serious problems for Korea’s foreign currency liquidity.

Shinhan Bank is now looking at plans for expanding non-resident time deposits with a primary focus on ethnic Koreans abroad and Korean expatriates. We are also looking towards an aggressive push to expand local deposits at our overseas branches.

Our ¥35 billion issue this July and the diversification of the currencies for fund-raising testified to our resolute determination to maintain the stable management of foreign currency liquidity.

Shinhan Bank CEO Jin Won Suh


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Economists endorse robust Korean economySouth Korea’s economic resilience in the face of the global downturn sees the country ranked in thetop 30 safest countries globally in the Q2 2012 results from Euromoney’s Country Risk Survey (ECR),with an improved post-Lehman ranking


South Korea has performed strongly in Euromoney’s Country Risk Rank-ings at a time when economists see increased risk across the developed world. Korea’s relative ranking in the ECR survey, which measures economists’ opinions of political and economic risk, has improved by three places since January 2012 to 24th globally. The country has leapfrogged struggling euro member states Malta and Estonia, while also overtaking Japan due to the latter’s economic stagnation. In all, Korea’s ranking has improved by 16 places since March 2008, with the country’s vigorous post-2008 recovery contrasting with the economic decline in Europe, with the sovereign now rated ahead of Spain, Italy and Cyprus by economists.

Yet, in absolute terms, South Korea’s overall ECR score has been decreasing in recent months, due largely to deteriorating global economic conditions.

One of the most open economies in Asia, Korea’s country risk score fell from 0.7 points between January and July 2012, a cumulative fall of 4.4 points over the past 12 months. Korean exports have been affected by the weaker external climate, with the central bank recently reducing in its growth forecasts to 3%, citing “weakened exports as well as a combi-nation of household debts and a housing market slump constraining domestic spending”.

Although the economy has been affected by the weaker external climate, ECR contributors have upgraded their scores for monetary policy/cur-rency stability in recent months – reflecting lower-than-expected infla-tion – as well as government finances, with the authorities able to boost infrastructure spending while also lowering the budget deficit in 2012

and targeting a surplus for 2013. The sovereign’s overall economic score increased 0.3 points to 64.9 in the six months to June 2012, in contrast with the average score for developed Asia, which fell by 0.9 points over the same period.

Export boostA competitive exchange rate has partially mitigated slowing global consumer demand and boosted Korea’s export sector. Fitch forecasts Korean exports to Europe to have increased by 25% between 2008 and 2012, whereas Japanese exports are expected to have fallen by 26% over the same period. The report highlights the 14% depreciation of

the won since 2008 versus the yen’s continued appreciation as a key driver behind this resilience.

South Korea’s economic outlook is stronger than Japan’s, with the IMF forecasting 3.5% real GDP growth in 2012, rising to 4% in 2013, compared with 2% and 1.7% for Japan. ECR experts award Korea a correspondingly higher survey score for economic outlook.

The weakest part of South Korea’s economic score is its bank stability indicator. Korea’s post-Lehman economic recovery was impressive, largely due to a vigorous countercyclical policy response by the au-thorities, yet economists remain wary of a repeat of the unprecedented capital outflows the country experienced in the last three months of 2008. The IMF noted in a recent statement that “despite substantial progress in strengthening the financial system, some potential vulner-abilities remain, with Korea… highly exposed to volatile capital flows and foreign currency funding risks”. Korea’s bank stability score of (5.8 out of 10) remains lower than those of Japan (6.8), Hong Kong (7.5) and Singapore (8.2).

Corruption scandalsIn an Asian context, Korea is still perceived as riskier than Singapore and Hong Kong, an assessment that tallies with Korea’s lower credit rating than either sovereign. Korea’s political score, at 67.4, is in line with the average for single A sovereigns, but lags other advanced Asian economies, with low scores for corruption and government stability (6.2 out of 10). A string of recent corruption scandals involving close allies and relatives of President Lee Myung-bak, whose term ends in February next year, have drawn a public apology while highlighting

the enduring influence of patronage networks across Korea’s govern-ment institutions. Although ECR experts marginally raised Korea’s over-all political score in 1H 2012, reforms are needed is Korea is to attain an ECR political rating equivalent to Hong Kong (81.7) and Singapore (88.6).

Indeed, such are economists’ concerns over the probity of Korea’s politi-cal system that the country is ranked below Taiwan for political risk, despite the enduring concerns over the latter’s diplomatic relations with mainland China.

Korea’s high scores in the survey indicators for credit ratings, debt metrics and access to capital markets support its overall score and position among the top 30 safest sovereigns in the world. In ECR’s structural as-sessment, which measures long-term country risk indicators such as hard infrastructure and demographics, Korea is ranked sixth in Asia, behind Malaysia and Taiwan.

Over 400 economists take part in Euromoney’s Country Risk Survey (ECR). They rate 186 countries across a range of political, economic and structural criteria. For the live results of the ECR survey go to www.euromoneycountryrisk.com.

“A competitive exchange rate has partially mitigated slowing global consumer demand and boosted Korea’s export sector”

Rank Country ECR Score Economic Political Structural

3 Singapore 88.0 77.0 88.6 84.7

10 Hong Kong 82.4 77.7 81.7 80.3

17 Taiwan 74.7 70.9 73.8 72.7

24 South Korea 68.7 64.9 67.4 64.9

25 Japan 68.5 51.8 72.8 66.5

Source: www.euromoneycountryrisk.com (All scores out of 100)

Asia Top 5: Country Risk Rankings ( July 2012)


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“The Gwangyangman FEZ offers the world a glimpse into what the future of Korean industrial, leisure and maritime affairs will look like”

Free Economic Zones – the future of northeast Asia

As northeast Asia strengthens its grip on the global market, South Korea is ramping up efforts to stay ahead. The country has designated three free economic zones (FEZs) in Incheon, Busan-Jinhae and Gwanyang, with another three (Yellow Sea, Saemangeum, Daegu-Gyeongbuk) added to the list to fuel long-term economic strategies.

Slated for completion by 2020, the six zones will focus on a diverse range of industries, including IT, international finance, tourism, automobiles, shipbuilding, education, green growth, fashion and medical services.

The series of groundbreaking projects will also provide world-class logistical infrastructure through Incheon International Airport (IIA) and Gwangyang and Busan seaports. Given their location, Busan new port and Gwangyang port and surrounding industrial sites are ideally suited for trade, finance and logistics.

Attractive to foreign investorsFEZs prove lucrative for foreign investors as they are larger than the basic unit of any local government and may exercise autonomous administra-tive power mandated by a provincial government.

Furthermore, in addition to tariff, rent, and local and national tax incen-tives for business activities, FEZs also encourage economic activity by providing optimum business and living conditions for foreign executives and staff in terms of education, healthcare, housing and administrative affairs. Companies that locate in FEZs are exempt from or subject to re-duced land fees. Regulations and complicated administrative procedures are further streamlined to meet global standards.

FEZs will serve as a northeast Asian business hub by capitalizing on the

state-of-the-art strengths of individual companies in IT and high value-added service industries like logistics and finance.

Investors will be entitled to income and corporate tax exemptions for the first three years and a 50% reduction for the following two years. For investments of more than $50 million, there is a 100% exemption for the first seven years and a 50% reduction for the following three years.

Much progress has been made in transforming the Incheon, Busan and Gwangyang regions into FEZs; each possesses well-established infra-

Six free zones to be completed by the end of the decade aim to draw businesses from around the world to serve the dynamic northeast Asian market of 1.5 billion people. By Gregory Curley

Songdo International City


structure including an international airport and seaports.

Economic dynamismNortheast Asia is well on its way to becoming one of the most economi-cally dynamic regions in the 21st century. Korea is right at its centre. A staggering 700 million people live within 1,200km of Suhul, which is more than the populations of the US and Europe combined.

With a population of 1.5 billion – four times the size of Europe – north-east Asian GDP is expected to account for a remarkable 30% of global GDP, emerging as one of the three major trade blocks that fuel global economic growth.

The Incheon Free Economic Zone triangle includes Songdo Intelligent City, Yeongjong Area (including IIA) and Cheongna Area. The 209 square kilometres will have a projected population of 475,000. These areas will become self-sufficient cities with international logistics and business centres, high-tech knowledge-based industries, and leisure and tourism complexes.

Songdo Intelligent City, a 15-minute drive from IIA, will be developed as a centre for Asia-Pacific multinational headquarters, global business and a high value-added knowledge-based and information industrial complex.

US-based giant developer and marketing agent Gale Company reached a real estate joint venture agreement with Korea’s POSCO Engineering & Construction – the second-largest steel manufacturer in the world – to develop Songdo Intelligent City as one of the world’s largest urban cen-tres from the ground up. The partnership, called NSC, will be responsible for developing 1,364 acres of reclaimed land on the waterfront over an eight-year period, at a cost of more than $12.7 billion.

IIA is currently the world’s fourth largest airfreight handler. The freight terminal will be expanded from its current 132,000 to 429,000 square metres by 2020.

Busan International Seaport is the third largest in the world in terms of cargo handling capacity. Sixty multinational shipping companies have set up operations there. A new seaport with 30 berths in both Busan and Jinhae was completed in 2011, making it a northeast Asian maritime capital in the 21st century.

The government has plans to develop a 4 million square metre interna-tional logistics and business complex that will house logistics handling, distribution services, and maritime and oceanic affairs centres.

Additionally, nearby Sinho and Macheon areas will be home to an indus-trial complex that will build advanced part materials. Here, automobile parts production will be promoted as a strategic manufacturing industry in association with Renault-Samsung Motors, which produces 240,000 cars annually. Renault-Samsung is considering increasing investment to raise production to 500,000 cars. Sinho is primed to become Renault-Samsung’s Asia-Pacific headquarters.

Home to POSCO’s Gwangyang Steel Works – the largest facility of its kind in the world – the Gwangyangman FEZ offers the world a glimpse into what the future of Korean industrial, leisure and maritime affairs will look like.

Creating an optimal business environment by providing the necessary infrastructure, including a metropolitan transport network connected to three nationwide systems and airport expansion, it will focus largely on port container handling, steel production and shipbuilding, together with an assortment of leisure facilities.

Seed of Korea’s transformationThe economic framework of the new free economic zones was spear-headed by the Ministry of Knowledge Economy (MKE), the central gov-erning body that was largely credited with Korea’s remarkable 60-year economic transformation.

Providing a vast array of experts to create synergies, spur innovation, and upgrade the nation’s economy, MKE has considerable leverage in creating a more business-friendly environment, improving the foreign investment environment and resolving investment-related grievances.

MKE firmly stands behind new growth engines largely through the sup-port of information and communications technologies and high-end manufacturing to meet the challenges of the 21st century

Since the onset of the financial crisis in 1997, the Korean government has been active in its efforts to attract foreign direct investment (FDI) to Korea. This was further facilitated by the enactment of the Foreign Invest-ment Promotion Act in 1998, which, in turn, sparked a significant increase in FDI over the past decade alone.

In an effort to step up foreign investment interest, the Korean govern-ment has plans to expand the margin of cash grant eligibility. Previ-ously limited to industry support services and high degree technology businesses, the new measures will allow for businesses in green growth industries and new growth engine industries to thrive and prosper.

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Shinhan: South Korea’s premier banking institution

Shinhan Bank (SHB) has gone to considerable lengths to ensure it remains South Korea’s number one financial institution. The first bank in the nation to introduce ATMs, self-service branches and internet banking, SHB has evolved into a leading financial institution, boasting total assets of KRW253 trillion, as of the end of 2011.

Last year, SHB recorded its best-ever results since its inception in 1897, with a net income of KRW2.1 trillion. Its year-end market capitalization exceeded KRW18.8 trillion, the largest in the country’s financial industry, and the eighth best among all the KOSPI listed companies.

Moreover, SHB was awarded the highest rankings among all Korean financial institutions from the world’s top three credit rating agencies,

including an upgrade to A from A- by Standard & Poor’s.

The financial goliath also boasts the largest airport-based banking network in the country, providing a wide array of financial services at Incheon, Gimpo, Gimhae and Jeju airports. It has also established an extensive network of branches and outlets at universities and hospitals.

And its presence in core markets shows no signs of slowing down. SHB it well ahead of its competitors in terms of customer loyalty and strategic operations.

“We are creating a strong customer base for the future by opening branches in major institutions and carrying out extensive marketing activities, such as area marketing,” says CEO Jin Won Suh.

The bank’s Institutional Banking Group (IBG) comprises a solid revenue structure, with a special focus on low-cost deposits and currency ex-change. In 2011, IBG carried out a wide range of activities to strengthen its relationships with its customers and add to its presence in new markets.

“IBG has plans to position itself as one of Shinhan Bank’s core groups through the implementation of three core tasks: increasing profitability by maintaining leadership in the market (defence), expanding long-term growth foundations (expansion) and supporting business development

(support),” Suh explains.

The strategy aims to further retain loyalty by providing customers with a full range of custom-tailored services, and building differentiated IT systems on an individualized basis.

Furthermore, by strengthening its marketing activities to increase the volume of younger clientele, IBG hopes to attract new, established or-ganizations, and expand its foundation even further to ensure long-term prosperity.

Strategic sustainabilitySouth Korea’s financial services industry is facing increasing competition

both domestically and abroad. Strengthening support for business devel-opment and broadening employee skill sets and improving managerial processes will ensure that SHB achieves its strategic objectives to provide a reliable cornerstone for the bank’s sustainable growth.

Tasked with establishing mid- to long-term strategies and business plans for SHB’s retail sector, including capital retail mass, wealth management (WM), institutions and small- and medium-sized enterprises (SMEs) is SHB’s Retail Business Development Group (RBDG). It spearheads pro-grammes to boost sales and supports operations through the establish-ment of efficient and effective customer relationship systems.

Comprising 95.5% of the bank’s total sales channels and employing 66.7% of its workers, RBDG plays a central role in providing a foundation for SHB’s sustainable growth.

In 2011, the retail banking industry was faced with a series of down-turns. The sluggish stock market reflected market uncertainties due to downgrades in the US’s credit ratings and increasing concerns about the financial situation in Europe.

Equally disconcerting was a sharp increase in the cost of home leases, which dampened investor confidence in the real estate sector. The continuance of these difficulties result in limited growth with several important earnings sources, such as funds and bancassurance. The bleak

Last year Shinhan Bank recorded the best results in its 115-year history. It doesn’t intend to rest on its laurels. By Gregory Curley

“The financial crisis in Europe seems to be continuing unabated, making the global financial market more volatile. Household debt will be another factor limiting economic growth, along with cut-throat competition within the banking industry”

Source: Central Bank of Uruguay


economic recovery outlook also affected household debt, which hit the KRW1,000 trillion mark.

Competition grew even further within the banking retail market due to the industry’s intricate competition structure, the strengthening of the National Agricultural Cooperative Federation’s retail banking operations by state-owned banks – Korea Development Bank and the Industrial Bank of Korea – together with the acquisition of the Korea Exchange Bank by the Hana Financial Group.

“To deal with the new series of market challenges, Shinhan Bank contin-ued with its strategy of upgrading its new WM business and smart bank-ing models to better prepare for uncertain growth,” Suh says. “We added a wide range of new products and services that included the Pension Bank Book and the S20 Brand that targets senior citizens and younger customers.”

In terms of financing, the bank added to its profitability by increasing its low-cost deposits and increased the weighting of its household-type deposits to comply with the Basel III Accord’s new standards for liquidity management.

“We further sought to attract more circulating accounts, such as salary accounts, settlement accounts, and bill collection accounts,” Suh explains. “The bank upgraded its management service to meet increasing cus-tomer demand since the financial meltdown of 2008, and built a series of new WM business models. Finally, Shinhan grew its share of the retire-ment pension market, consolidating its leading position in that sector.”

To upgrade its signature ‘superior system’, Shinhan expanded its customer management team system – the central component of Retail Revolu-tion 3.0 – and optimized the performance of its direct sales channels, further establishing a number of new-concept channels to keep up with customer demand.

“In addition to this revolutionary new system, we launched our exclusive

NexB business to create revenue models through non-direct channels, introduced the Service Capability Level (SCALE) to improve customer satisfaction levels, built new video conferencing systems and developed improved systems for monitoring interest rate approvals.”

By carrying out these strategies, RBDG experienced far better results than any of its competitors in terms of customer base, core businesses, profit-ability and market share. At the end of 2011, RBDG had an impressive 7.4 million customers, 2.1 million of whom were using Shinhan Bank as their primary financial institution.

Moreover, total loans and deposits amounted to KRW96.5 trillion and KRW132.4 trillion, respectively, while core deposits, operating revenue and earnings before taxes (EBT) stood at KRW31.1 trillion, KRW32.3 tril-lion and KRW0.9 trillion respectively. The delinquency ratio on loans was 0.58%.

SHB attracted 300,000 new major customers, widely exceeding its original target of 230,000; the number of active customers increased by 720,000.

The bank also maintained the highest level of asset soundness in the industry, ensuring safe and steady growth in household loans, and enhancing the quality of its SOHO assets. SHB boasted delinquency ratios of 0.58% and 1.13%, respectively, for household loans and loans to the self-employed. The value of its core deposits increased by KRW1.6 trillion year-on-year, well above its original target of KRW600 billion.

Also impressive is the fact that the bank attracted Korea’s largest non-direct channel customer base, with the number of its internet banking and smartphone banking customers amounting to 9.7 million and 2 million, respectively.

Given Korea’s rapidly ageing population, the retirement pension market was the most competitive sector in the entire financial industry in 2011. SHB was able to secure its lead in that market, increasing the value of its retirement pension assets under management by KRW2 trillion over the year.

Not one to rest on his laurels, Suh expects the operating environment in 2012 to be extremely challenging. “The financial crisis in Europe seems to be continuing unabated, making the global financial market more volatile. Household debt will be another factor limiting economic growth, along with cut-throat competition within the banking industry,” he notes.

Yet RBDG is confident that it can cushion the impact of global fluctua-tions through a series of newly implemented ‘smart’ strategies for 2012 that will focus on balanced asset growth (smart asset), customer selec-tion (smart business), and system optimization (smart channel).

“Our overall goals will be to achieve stable growth through the optimized distribution of our resources and increase customer trust and employee pride,” Suh assures.

To fully incorporate the smart asset strategy, the bank will concentrate on improving its profitability margins even more, while seeking steady and balanced growth in its volume of prime-quality household loans and loans to the self-employed.

In terms of funding, SHB will increase the weighting of household deposits and core deposits. The bank also plans to maximize non-interest

Shinhan Bank Headquarters


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income through the application of enhanced synergy operations, such as funds and bancassurance.

For its smart business strategies, it will address three key target markets: high net asset customers, office workers and the self-employed. The bank will focus on attracting and maintaining its number of high net asset customers, so that it can quickly implement its new WM model.

“SHB will build systems that meet the real needs of its operating sites by optimizing channel competitiveness and improving its customer man-agement system,” says Suh.

“Consumer protection activities will be strengthened, education and training programs will be upgraded to enhance the skill set of employees, and leadership costs will be attained through efficient organizational operations.”

Asset management solutionsOriginally part of the WM Consulting Team, the Wealth Management Solution Department (WMSD) became a company-wide organization in 2012, assigned with providing integrated asset management solutions

to the bank’s retail, private wealth management and private banking channels. It’s primed to becoming Korea’s leader in the asset manage-ment sector of the financial industry, providing customers with advice, information, and services.

The department played an instrumental role in maintaining SHB’s reputa-tion as a leader in the area of customer-related asset management in 2011, and hopes to continue its reign.

Beginning in 2012, WMSD will offer three integral services that will strengthen the customer consultation and asset management skills of the bank’s front-line workers. Furthermore, it will provide a ‘multi-advi-sory service’ through which experts in such areas as taxes, real estate, stocks and bonds, industrial analyses and family business successions visit customers at their homes or offices to provide full customer support. SHB was the first in Korea’s financial industry to create a team of asset management experts on a group-wide level.

To stand out further among its competitors, the newly established de-partment will implement a pre-emptive ‘red-flag’ service, which analyzes customers’ portfolios before problems arise in such areas as asset alloca-tion and investment vehicles, together with its ‘portfolio retouch’ service, which offers advice on how a portfolio should be properly weighted and produces semi-annual performance reports. In addition, it will offer custom-tailored portfolio proposals to meet customers’ needs.

Stable investmentDespite slowdowns in the fund market, the department’s sales for 2011 amounted to KRW4.8 trillion, the best of all Korea’s banks. SHB was also the first player in the country’s financial industry to form a task force team to deal with the sudden drops in the market that occurred in the second

half of the year.

SHB also led Korea’s banking industry in terms of fund sales and earn-ings. This was largely accomplished by introducing a diverse range of products tailored to specific customers segments (including public offiering-type, wealth management customers and private banking private equity products), and by focusing on instalment-type, ELF and ‘buy on scale’ funds.

SHB recorded the nation’s largest-ever sales for the second year in a row, while commission income surged to KRW1.1 billion over the year.

In 2012, SHB’s Investment Product Department (IPD) will continue play-ing a leading role in creating customer value through the development of lucrative investment products. Its activities will include spearheading product strategies, introducing additional products and offering model portfolios structured to meet the growing needs of investors.

In collaboration with Shinhan Investment, the group intends to broaden its portfolio of investment products to better respond to market fluctuations.

Enhanced customer supportBeginning this year, SHB has plans to build an enhanced support system that will empower customers and employees to make confident invest-ment decisions. Its Synergy Management Department will oversee the bank’s synergy business, including credit cards, securities and investment banking, with a special focus on channel operations.

SHB’s credit card business has also reached new heights. Last year, 850,000 Shinhan Card customers opened settlement accounts and be-came SHB customers, of which 139,000 were active customers.

The bank enjoyed similar success with its Shinhan Insurance service: 100,000 people opened settlement accounts, and 18,000 became active customers. In the bank’s cross-channel operations, 313,000 credit card customers enrolled.

In the securities sector, earnings rose by KRW500 million over the year. This increase was due to a rise in the number of the bank’s affiliated securities firms, as well as healthy growth in the number of its financial network account customers.

In 2012, the division will expand its customer base even further to achieve its growth targets through three major strategies: adding to the number of synergy areas and encouraging a greater level of cooperation with other group members; increasing the number of cross-customers and enhancing its support system, with a focus on operational sites.

With long-term plans to increase its already growing customer base by turning more Shinhan Insurance, Shinhan Investment and Shinhan Card customers into loyal SHB clients, SHB looks set to retain its title as the country’s favourite private banking institution.

“Our overall goals will be to achieve stable growth through the optimized distribution of our resources and increase customer trust and employee pride”


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