[Start Economy] Successful Incorporation of Korea's 'World Debt Index'..."This" is a variable?

■ Host: Anchor Lee Jung-seop, Anchor Kim Jung-jin
■ Starring: Lee Jung-hwan, professor of economics and finance at Hanyang University

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information. Please specify [YTN News START] when quoting.

[Anchor]
We deliver the economic news quickly and kindly. Start Economy, today with Lee Jung-hwan, a professor at Hanyang University's School of Economics and Finance. Welcome. We told you earlier in the report that Korea has been incorporated into the global government bond index. After trying four times, I became part of the developed country's government bond club. Can you explain this to me?

[Lee Jung-hwan]
First of all, it is said that it is an index of government bonds from advanced countries, but most of them are literally collecting government bonds from each country. There are developed markets and developing markets. Rather, the front market is divided into a slightly worse market. The incorporation into the developed country index means that it has been recognized as an advanced country in the capital market itself. Why are these important. I think it can be said that it is because individual investors and institutional investors are in different positions. In the case of pension funds, profitability is important, but safety is important. What it means to value safety is that the demand for investment in the index is very high. The high demand for investment in the index is that bonds also buy various overseas bonds to manage the index stably, so to speak, setting a benchmark. It is said that foreign bonds set up indexes like the World Government Bond Index, and overseas stocks set up MSI advanced countries' indexes. Setting up a narabi means managing the portfolio. If you don't do that, you can do it without doing anything like exposure. Of course, you can do it in terms of profitability, but pension funds are especially important to leave the pension, especially to manage the pension index. In the case of pension funds, the trustee, the pension paid by us, so stability is important and safety is important, which means that we have no choice but to benchmark the world index, the bond index and the stock index. In other words, there is always a demand for the story that there is no choice but to benchmark. I'm saying that we should continue to invest from this side. In the end, the fact that there is a benchmark when investing means that investors have to follow it as it is, so investors have no choice but to focus on this side. It can be seen as a stage that institutional investors can inevitably secure. And I think there are three major standards. It is said that the amount of bonds issued should be large, and if you want to go to developed countries, the amount of bonds issued should be large, so the price of school expenses is more than 50 billion won. The credit rating was also S grade or higher, followed by market access, but in the case of the foreign exchange market, it was operated during the day and not at dawn. It can be seen as belonging to the World Bond Index as the effect of increasing the operating hours of the foreign exchange market is reflected. In a way, it can be understood that when investors invest in this market, it is important to make sure that I do not feel uncomfortable in raising profits, realizing profits, and getting out. The global government bond index did not create an index, but in a way, it created a fixed demand for investment, which helped stabilize Korea's government bond market and globalize it, so you can understand that the policy was effective.

[Anchor]
After a one-year grace period, it will be reflected in the actual index from November next year. What are the areas we expect to see about the effects on our economy?

[Lee Jung-hwan]
I said earlier that there is a fixed demand, but people who have to buy Korean government bonds usually follow the index, but these investors have no choice but to increase. They say that it will increase by 90 trillion won or 70 trillion won, which reflects the size of Korea's government bonds. The fixed demand is that it's easy to issue bonds. So if demand increases and supply is constant, prices fall, and if prices fall, interest rates fall in bonds. So, when Korean government bonds are issued overseas, there is always demand for bonds, so in the end, you can borrow money a little cheaper. In the end, we expect a trickle-down effect on companies, not just in Korea, but the domestic bond market is a little small, but with some demand, wouldn't it be possible for domestic companies to issue interest rates slightly lower based on such demand when issuing bonds abroad? It is true that we expect that the cost of raising capital will be a little lower.

[Anchor]
There are various such expectations, and some are concerned that if the proportion of foreign capital flows into the country in the end, certain external variables will become more sensitive. What do you think?

[Lee Jung-hwan]
The bond index is different. As I said earlier, there are a lot of stable investments like pension funds, long-term investors, and if they don't get incorporated into this index when benchmarking this, these pension funds should continue to maintain their positions to some extent. It is now predicting that it will be 2.2%, and it can be funded in the long run that major pension funds maintain this position. So, the size is a problem for foreign investors, but going back and forth in a short period of time is a problem. When Korea needs a lot of foreign exchange and suddenly, when it needs a lot of foreign exchange, a sudden outflow of money causes problems, but in the case of the bond index, that tendency is a little less. As I said earlier, the major investors are institutional investors, and in the case of pension funds, this situation is lessened because of this situation where they have to hold them for a long time. As you said, the increase in the number of foreign investors itself is a part of increasing the volatility of the foreign exchange market, but the number of people investing in Korea has increased, and the focus is pension funds. When you look at these things, you can see that they can act as a factor to reduce the volatility of the domestic foreign exchange market.

[Anchor]
First of all, bonds are the targets. So is it related to the stock market?

[Lee Jung-hwan]
There's actually a bond index. FTSE Russell would have done both. FTSE Russell is a representative organization that creates these indexes. There is a bond index and a stock index, but what you just said is related to the stock index. In the FTSE Russell, Korea is incorporated into the developed country index, but there is also an issue of short selling to be incorporated. There may be an issue that the ban on short selling should be eliminated, but first of all, there are a little different aspects, and especially the ones that have been mentioned now, such as the ban on short selling, have become a little more restrictive in the Korean stock market. Although other developed countries, of course, maintained short selling during the COVID-19, they have now been released so that foreign investors can manage portfolios that can realize profits. So, because there is a difference, you can say that you have still expressed dissatisfaction with the Korean capital market. While talking about this going a little long, I think I can tell you that Korea, which is now included in the FTSE Russell index of advanced countries in the stock sector, could also be lowered to the countries to be observed.

[Anchor]
As you mentioned earlier, we are now avoiding the designation of an observation target country that can be a major negative factor for our financial market. How do you think the results will be on the issue of short selling in March next year, as FTSE Russell has said to quickly resolve the issue of banning short selling?

[Lee Jung-hwan]
It is true that short selling in Korea has it for a relatively long time compared to advanced countries. In fact, short selling is a good way to reflect the expectation that the stock price will fall. However, from Korea's point of view, it is a slightly tilted market. We're talking about improving these things because it's a tilted market for institutions and they used it to manipulate stock prices or rise, but in this process, the ban on short selling is getting longer. However, in the eyes of investors in developed countries, there are strategies that we can use when we often talk about investment strategies and strategies that we can use when we get off. If you block the side that goes down, there will be a very difficult situation for investors, and this will be reflected and put pressure on the government. It is true that there is pressure to lift the ban on short selling, as foreign investors may leave if it falls into the advanced countries index of FTSE Russell and it could also negatively affect what is commonly called the value-up efforts.

[Anchor]
I hope that the value of our market will increase day by day. Let's take a look at the next news. The parliamentary audit is continuing now, but in this time, we will talk about the economy. In the financial sector, Woori Financial Group Chairman Lim Jong-ryong will attend the National Assembly for the first time as the chairman of the four major financial groups. Then, there must be a lot of questions about relatives' loans here, right?

[Lee Jung-hwan]
It is called Woori Financial Group, but there is a lot of talk that internal control of Woori Financial Group has failed, mainly by banks. As the anchor said, the fact that a relative of the holding chairman received a fraudulent loan can be interpreted as a more serious problem than a problem at the governance level or an individual level. In fact, if employees did these things through deviant activities, it can be understood as a kind of fraud and escape the problem of internal control. There are concerns that the previous governance problem, some control problem, and so on, the so-called control problem of the holding chairman, are a little concerned about the overall management. In particular, we say that these are issues because of the fact that they made unfair loans, but also because of our financial group's response. When I found out about this, I should have informed the Financial Supervisory Service quickly and cooperatively dealt with the response, but I think it is a problem as there is an issue that it did not. In fact, the lender has not been in office since Chairman Lim Jong-ryong took office, but after Chairman Lim Jong-ryong took office, the issue of whether the response to this is wrong has overlapped, and it can be understood that they are seriously considered. In addition to this, there are financial accidents or a number of financial accidents at the Gimhae branch, so I think they are going to clarify this and express their position to strengthen internal control.

[Anchor]
However, some say that it is a step to complete the M&A problem that is currently being pursued. What do you think about this?

[Lee Jung-hwan]
Woori Financial Group did not have a securities company a year ago because it has a different structure from Shinhan and KB Financial Group. Since life insurance companies and insurance companies are vulnerable, it was a structure in which sales were mainly made by banks. Therefore, it is said that there was a structure in which the conflict within the bank spreads to the overall risk of financial holdings as sales are only made mainly by banks. Recently, as the profits of the financial investment industry have risen so much that the profits of securities companies are becoming important, and life insurance companies should have these life insurance because the demand for life insurance is increasing as life expectancy increases. As Woori Financial Group cannot operate without securities companies or life insurance companies, Chairman Lim Jong-ryong actively took over Post Securities and Dongyang ALB Life Insurance. However, since the final approval of the Financial Supervisory Service is required during this acquisition process, it is showing a willingness to resolve the acquisition process of Dongyang ALB Life Insurance by actively explaining and solving internal control problems.

[Anchor]
In addition to Woori Financial Group, there is also a president of the National Agricultural Cooperative Federation who will appear at the audit, and in the end, the National Agricultural Cooperative Federation will not be free because it had financial incidents such as embezzlement or breach of trust.

[Lee Jung-hwan]
Nonghyup Financial Group is one of the top five financial holdings, but the difference between Shinhan, KB, and Woori is that Nonghyup is not listed. The aspect that it is not listed is bound to lack surveillance from the outside. And because of the lack of this process, and in the case of Nonghyup, there are so many stories that these accidents occur as internal control becomes difficult because there are so many branches in the provinces. In the end, the National Agricultural Cooperative Federation has the most accidents, and this reflects the characteristics of the National Agricultural Cooperative Federation, there are too many branches in the provinces, and it is not a listed corporation. NH Nonghyup is also actively willing to solve these problems at Nonghyup Bank, so it can be seen as a process of expressing its opinion on how to change the internal control problem and how to change the problem of fraudulent loans.

[Anchor]
Although we have given the example of Nonghyup, anyways, major domestic banks have been involved in fraudulent loans, embezzlement, and breach of trust. What should I say is the reason?

[Lee Jung-hwan]
Individuals commit fraud for various reasons, but it is said that there was a lack of institutional prevention of these things in the past. The easiest things to prevent are the things that prevent you from working for a long time. In the end, if the work process changes every two to three years, it is reviewed every two to three years. So, because successors have to clearly understand how their predecessors did it, they have no choice but to quickly check every two to three years, and in the process, issues can eventually be known quickly and control can be strong. I think many loan accidents were done by long-term employees, or long-term employees, with incentives in the case of Gyeongnam Bank loan accidents. So, in the end, there is internal control on paper, but we need to create a little more mechanisms to strengthen internal control a little more systematically. Since it is a job that deals with a large amount of money, there is a high possibility that individuals will deviate. Because if you say you can live well for the rest of your life even if you have only a part of it, there are many incentives like this. In the end, internal control has no choice but to strengthen such regulations and institutional reinforcement, strengthen in-house education, and prevent it systematically. And why do these issues arise by informing the Financial Supervisory Service or places like this if they say they have occurred? And you can think of it as important to understand whether this is a problem with the financial institution's work itself or the problem of banking so that the other side does not come out.

[Anchor]
In the midst of continuous financial accidents like this, there are also articles saying that banks had a money party by collecting a lot of interest income. How do you see this part?

[Lee Jung-hwan]
There is a story that banks' interest income has increased by an all-time high. At the root of that, there is a huge increase in loan assets. Since the 2010s, banks have often referred to their growth strategy as net interest margins, but rather than increasing the difference between loan interest rates, capital raising costs, and savings rates, they have formed a structure that can accumulate profits by increasing loans, especially by increasing mortgage loans. And if you look at the annual growth rate, it grew by 10%. Since the loan balance has increased very quickly, the increase in the loan balance over the past 10 years is not a common margin, but a structure in which net profit is accumulated as the scale increases significantly rather than the difference in the loan-to-deposit interest rate. How do you use these things when interest is accumulating? Now, there are opinions that you are spending too much on things like voluntary retirement. Isn't it that wages are excessive in the financial sector as there are rumors that wages are higher than those of Samsung Electronics and Hyundai Motor? There are continuous opinions that retirement benefits and other things are being overestimated. Banks themselves continue to reduce sales and management costs because they compete with online banks. There are incentives to reduce these employees and incentives to go online, which are being criticized for increasing loans too much and increasing stable mortgage loans to do interest business, but there are also some aspects that seem to be true at first glance.

[Anchor]
Professor, I believe that the banking sector's operating profit will continue to increase as loan interest rates rise in this situation. Do you think this trend will continue in the future? What do you think?

[Lee Jung-hwan]
As I said earlier, it is said that it is a net interest margin, but the difference in the loan-to-deposit interest rate has not increased that much compared to the past. Since it has grown so big, it is said that household loans continue to exceed record highs, but as it increases, it is inevitable that issues will arise. This problem will inevitably continue in the future. And there is also a story about banks to do something other than the commonly called credit work. So, there is a story to strengthen non-interest income, not this commonly called interest income, but there are aspects that Korea has severe platform regulations, so banks can't do as much as they want. And there may be differences between the financial supervisory authorities and the government, and the financial supervisory authorities' good profits can also be helpful in terms of the financial system safety net. When I think about the IMF period, there was a financial crisis when banks became insolvent, and it's not just a bad thing to take a lot of profits from banks, so I think I can tell you that a sound financial system will be created only when regulatory reforms that can be properly balanced and non-interest income are overlapped.

[Anchor]
It was pointed out that interest is expected to continue to accumulate because there are so many loans that have been executed in the past. Now tomorrow, the Monetary Policy Committee will be held at the Bank of Korea. The market is interested in whether it will eventually cut interest rates, what do you think?

[Lee Jung-hwan]
I think the probability of a rate cut is a little higher. Many predict that more than 60% of interest rates will be cut if we do market surveys. On the basis of that, as the price index fell to around 1%, it became lower than the government's goal, so the reasons for delaying the rate cut were slightly reduced. The reason for delaying the
rate cut seems to be the household loan issue, but household loans are also likely to be lowered this time as some say that they are stabilizing in October. Because if you don't get off now, the insolvency rate of self-employed people is increasing. Then, commercial facilities continue to be vacant due to rent, and many of these issues are occurring. These are situations where domestic demand is inevitably sluggish. In the end, the Bank of Korea's biggest focus is on implementing interest rate policies to revive domestic demand. Stabilizing the real estate market while shrinking household loans. In the end, prices themselves are coming out too stable, and in a way, the problem of vacancy rate is serious and accidents are too large, so I think the environment to make a decision in October rather than in November.

[Anchor]
We'll have to wait and see tomorrow's Monetary Policy Committee. Let's take a look at the New York Stock Exchange. Despite the big tech mix, the New York Stock Exchange's three major indexes rose all at once and the S&P 500 hit a new high.

[Lee Jung-hwan]
I'm very interested in why it's going up. As a trend, it seems that there is a possibility of a slight increase until the election. There seems to be an expectation that they will actively take action to offset the price issue before the election. The Dow Jones rose a lot along with the Nasdaq because expectations for a recession have eased a little. In the end, if the Nasdaq rises a lot when stock prices rise, investment will take place actively as the benchmark interest rate rises a lot, and the Dow Jones' rise yesterday reflected the fact that the probability of a recession fell slightly even though the FOMC minutes were basically released. However, since the market itself is very uncertain, and the routes through which interest rates have been cut are not accurate, I can tell you that there are cases where the market plunges a little more at any time, and it is a market that needs to be adjusted.

[Anchor]
In the market, there is even a prediction that a hard landing or a soft landing can be made without a landing. But international oil prices are also a variable. It's been going up and down for two consecutive days. I think there's a Middle East variable.

[Lee Jung-hwan]
The biggest issue was how Israel would respond, especially as Iran fired missiles as the relationship between Israel and Iran became a little difficult. If Israel attacks Iran's oil-producing facilities and paralyzes the economic environment, it is likely to be an all-out war, and if oil-producing facilities are paralyzed, oil exports are difficult. It has been going up for a while due to concerns that oil prices would skyrocket due to difficulties in exporting oil, but what is being said now is that we will not attack oil-producing facilities, we will not attack economic activities, but we will directly respond to Hezbollah and negotiate a ceasefire. If there is a problem, you can understand that prices are stabilizing because they are attacking Hezbollah itself. In the end, if we try to go all-out war, we have to hit economic facilities, but the possibility of hitting economic facilities is decreasing, and oil prices are falling a little as we move toward negotiations with Hezbollah and local conflicts with Hezbollah.

[Anchor]
I see. That's all for today's economic issues. I was with Lee Jung-hwan, a professor at Hanyang University's School of Economics and Finance. Thank you for talking today.