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South Korea

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South Korea Raises $250 Million in Policy Bank Share Sale

i) Summary: The South Korean government managed to sell down its stake in Industrial Bank of Korea by 4.2%. The sale raised around $250 million, which is double of what was originally expected. This sale is good news for the government of President Park Geun-hye because he has pledged to help individuals who are financially troubled as well as small businesses. This sale is expected to help secure budget revenue in addition to furthering stake sales in the following year. It also helps by releasing more liquidity into the market. In mid-2011, the government had failed at its attempt to lower the governments stake in IBK from 68.9% to 60.5%. In total, the government sold 23.2 million shares at a fixed price of 11,400 won ($10.75) per share. The finance ministry stated both local and foreign investors evenly shared the offering. IBK was established as a bank policy to support small and midsize businesses in 1961 and went public in 2003. ii) Background: Industrial Bank of Korea has contributed to facilitating the economic activities of SMEs and enhancing their economic status. IBK has proven itself during challenging times such as the 1997 Asian financial crisis and the 2008-2009 global financial crisis. IBK started with only 200 million capital stock but is now a powerful bank that competes globally with the world’s best banks.
As the world’s seventh largest exporter, South Korea has shown barely any economic growth this past October. South Korea’s growth of sales to China, the United States, and the European Union have all slowed down and its exports to the Association of Southeast Asian Nations (ASEAN) showed one of the worst declines since the recent global financial crisis. South Korea’s exports include 18% by ASEAN, 27% by China, and 10% by the United States. The finance ministry is also expecting a tax revenue shortage of up to KRW8 trillion (USD7.55 billion) this year. Economist at HI Investment & Securities in Seoul, Park Sang-hyun, believes that global trade will remain weak for at least the first two quarters of the upcoming year because any recovery in the big economies will mostly be led by consumption of small items rather than machinery and investment goods.
Before the recent IBK stake sell down, the Ministry of Strategy and Finance came to own the shares of IBK in 2008 when the government increased IBK’s capital by granting the shares. The block trades of IBK come as the main KOSPI market trades are at its highest level in over two years. The KOSPI ended at 0.2% at 2056.12 on Tuesday, its highest close since August of 2011. The strong foreign investor appetite for cheap stock has aided in the rise of the KOSPI market trades. Since July, foreign investors have consumed about $13.5 billion of stocks listed on the KOSPI. iii) Analysis and Comment:

The recent $250 million sale of shares in IBK is certainly a win for South Korea, however, it is only the start of what is needed. The government of South Korea sold the stakes of IBK in efforts to raise necessary revenue to meet its growing fiscal need. The government’s intentions to sell down its shareholding in Industrial Bank of Korea to 50% is putting South Korea on the right track during the economic slowdown that it is facing. However, selling down its shares from 68.8% to 50% is not going to repair everything for South Korea.
The Ministry of Strategy and Finance will have a 90-day-lock-up before it can again attempt to further sell its stake in IBK. While the recent sale of shares went extremely well, it is not guaranteed that the next stake sale will be as successful. IBK stake sales in the past have failed due to unfavorable market conditions. When the government of South Korea tries again after next March to sell down its shares, it is unsure at the moment as to how the sale will go. This is why the ministry will be closely monitoring stock market conditions before it attempts the sale next year. If the government can cut its shareholding in IBK to 50% then about 1.7 trillion won in non-tax revenue will be raised. The ministry said that its sale price is higher than the average purchase price of 7,968 won apiece based on its money injection into the bank over the past five years. The price is still lower than the recommended amount of 12,000 by a committee comprising of government and private-sector experts. The sale of the government’s stakes in IBK for the first time in seven years allows the government to secure some capital to make up for the shortfalls in revenue. It also creates a favorable market environment for the sale of the remaining stake in the future. There are some concerns that the sale of IBK by the government could mean a change in the bank’s AA rating. Fitch, an international credit rating agency based out of New York and London, states that as long as the South Korean government does not sell its shares below 50%. It show also be known that the government of Korea is legally obliged to cover IBK’s losses if the bank’s capital reserve funds are unable to do so. IBK’s focus on small manufacturing companies is becoming more and more important in Korea’s recovery from the 2008 global financial crisis. It also aids in delivering the governments objective to create more jobs by fosters SMEs. Fitch also believes that the sale of the stake in IBM will not result in a drastic change to IBK’s operations. The only change that could possibly occur is that the bank may become more commercially driven. Overall, I feel that the government is making a smart move by selling some of its shares in IBK. The funds are greatly needed to help keep the country afloat during its economic slowdown. IBK has helped South Korea a great deal since it endured the financial crisis of 2008 and the stake sale of IBK is a necessary move to help the government’s effort to raise funds for the welfare initiatives as part of President Park Geun-hye’s pledge. I am hopeful that the next sale of IBK shares by the government will be as successful because I know that it will help the economy get back on track. Also, I believe the $250 million shares in sales will help increase South Korean exports as well as gain its competitiveness against Japan.
IV) Questions:
Do you believe that stake sales in IBK will be enough to help South Korea during its current economic slump?
What are your expectations for the next sale of IBK shares by the government expected after next March? Do you believe it will be as successful as the recent sale?
V) References:

2012 Annual Report. (2013). Seoul: Industrial Bank of Korea.
Dhungana, G. (2013, November 27).Retrieved November 29, 2013, from
Gov't sells part of its stake in IBK. (2013, November 26). GlobalPost. Retrieved November 29, 2013, from
Kong, K. (2013, November 27). Wall Street Journal. Wall Street Journal, p. 1.
Korea's IBK Minority Stake Sale Neutral to Bank's Rating. (2013, June 13). Fitch Ratings. Retrieved November 29, 2013, from
Lee, J. (2013, November 26). S.Korea offers $142 mln stake in Industrial Bank of Korea. Reuters. Retrieved November 29, 2013, from
South Korean government upsizes IBK block sale to USD250 million. (2013, November 26). Venture Capital Post RSS. Retrieved November 29, 2013, from
Yoo, C. (2013, November 30). Global recovery still too weak, South Korea data shows. Reuters. Retrieved November 30, 2013, from

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