SEOUL: The South Korean government said Monday it has asked state-run companies with high credit ratings such as Korea Electric Power and Korea Gas to reduce their bond issuance, amid criticism they are absorbing too much money in the corporate debt market.
The finance ministry announcement comes as the country’s private companies and financial firms have struggled to raise money in the bond market over the last few months and as financial authorities move to help them raise more funds.
Analysts say Gangwon Province near Seoul triggered volatility in credit markets in September by refusing to repay some 200 billion won (US$149 million) of debt of a developer it owned. Surprised by the market reaction, Gangwon governor Kim Jin-tae reversed course, promising to repay the debt by Dec 15, though it was too late to calm investor jitters.
“Financing costs in South Korea have spiked very sharply since then,” Fitch Solutions said in a report on Thursday. “Most notably, the spread of commercial paper rates over the Bank of Korea’s benchmark policy rate has widened dramatically from around 0.7 percentage points in early October to 2.5 percentage points at the end of November.”
The finance ministry also said it will cut the country’s issuance of sovereign bonds by 60% next month. It said the government will issue sovereign bonds worth 3.8 trillion won in December, down from its initial target of 9.5 trillion won.
“We agreed that we should mobilise all resources to stabilise short-term financial markets while carefully monitoring movements and risk factors at the year-end and early next year,” finance minister Choo Kyung-ho said after hosting an emergency meeting with Bank of Korea governor Rhee Chang-yong and other policymakers.
The BOK said it will inject 2.5 trillion won into financial institutions that buy corporate bonds in the market. The finance ministry said the government-controlled Korea Development Bank and Industrial Bank of Korea will also speed up their bond-buying programme to provide liquidity in the market quickly.
South Korea’s central bank was the first major central bank in Asia to hike rates since the onset of the pandemic but has begun slowing down its pace of monetary tightening amid the rising credit stress in the country’s corporate bond market.
The BOK last week raised its key rate by a quarter of a percentage point to 3.25%, following a half-point increase last month. Rhee had initially signalled a bigger move but later hinted at a slowdown, citing unfavourable market conditions.