Hurry-up given Sth Korean conglomerates

By Yoke Har Lee

Korea's top five conglomerates, or chaebols as they are known, are not restructuring fast enough, says the head of the country's top policy-making commission.

Kim Tae-Dong, the chairman of Korea's Presidential Commission on Policy Planning, told the Business Herald the Government was running out of patience with the big chaebols (loosely translated as "clusters of fortune") as they work out restructuring schemes with their creditor banks.

"After 18 months progress is not satisfactory, especially in paring down their activities to core businesses and raising standards of accountability," said Mr Kim.

The Government would leave chaebols to fail if they did not restructure within reasonable time.

"The President [Kim Dae Jung] has said, over and over again, there will be no exceptions. Market disciplines will have to prevail."

Smaller chaebols had made more progress restructuring, but while larger ones such as Samsung, SK and LG Group had made some headway, the pace and nature of reforms was not enough.

The chaebols have been told to work on five areas: improving transparency, eliminating cross-guarantees for related companies, improving debt-to-equity ratios, focusing on their core businesses, and raising accountability.

But when it comes to core businesses, for example, all the chaebols have listed financial business as a core activity.

"Some have three, four, even five core businesses, including financial services. Foreign investors won't understand this - how one group can have financial as well as non-financial services as a core? They should choose one over the other, not both," said Mr Kim.

"During the last 18 months, most of the major chaebols have raised their stakes in the financial industry. What they say on paper and what they do are opposites."

In the area of reducing debt-to-equity ratios the two largest conglomerates - Hyundai and Daewoo - actually had higher ratios at the end of 1998 than in 1997, he said.

These companies had managed to produce artificially high equity ratios by grouping their investments in their subsidiaries.

"The 1999 fiscal balance sheets will be announced at the beginning of next year. Based on the agreement with the International Monetary Fund, they will be required to announce a consolidated balance sheet. Inter-subsidiary investments will be cancelled out and the debt-to-equity ratios will turn out to be high."

A change being introduced to bolster corporate accountability is appointing independent board members on the conglomerates.

But, said Kim: "All the chaebols have appointed figureheads. The new board members are 'yes men'."

Working first on reforming its banking system, South Korea has closed five banks in the past 18 months and forced five more to merge with bigger banks.

The Government used to provide guarantees on all financial deposits. "Now it is not the case. Depositors will have to shop around to see which banks are safer than others. It may look elementary but we are trying to apply global standards to South Korea ... and the gap between us and the global standard is huge."

The sale of Korea First Bank to foreign institutions, for instance, has not succeeded solely because the bank's balance sheet was not transparent.

"If they don't trust the balance sheet of our banks, the buyers can't decide on the price of the bank."

But while decrying the chaebol's progress, Mr Kim said the country's macro-economic statistics had improved remarkably over the year.

"The exchange rate has been stable, interest rates are down to single-digit levels. Real growth rate for 1999 is estimated at between 6 and 9 per cent. Almost every macro statistic looks rosy with the exception of unemployment."

Mr Kim's personal worry is that the structures governing business have not improved much and the macro statistics cannot be sustained unless that happens.

Several areas of optimism can be found, however. Mr Kim said the reforms had the people's approval.

Although anti-reform campaigns had been at work the country would eventually realise that market principles would prevail.

"The goal is to make us one of the most business-friendly nations. Only that can improve job opportunities and people's welfare."

* This is the first in a series on the Korean economy. Next: the chaebols' grip on the nation.

Yoke Har Lee travelled to Korea at the invitation of the Korean Government.