IMF expresses concerns over Korea’s PF-loans debt defaults

The International Monetary Fund (IMF) warned of financial market instability in South Korea stemming from real estate project financing (PF) on Tuesday (local time). Although the crisis was contained last year with the government and the central bank’s liquidity support following the Legoland scandal, the IMF noted concerns about debt defaults amid interest rate hikes and falling real estate prices.

In its Global Financial Stability Report, the IMF said that the global banking crisis triggered by the collapse of Silicon Valley Bank (SVB) shows the expanded vulnerability of the financial sector due to years of low-interest rates and sudden rate hikes and that these risks could deepen over the next few months as monetary tightening continues.

The IMF mentioned the risk of non-bank financial institutions, citing last October’s Legoland corporate bond market crisis in South Korea. The fund pointed out that “Korean PF loans have a vulnerable funding structure and significant maturity mismatches” and that “the risk factors remain present as headwinds, such as a decline in real estate prices, continue, although the possibility of further increases in Korea’s PF loan delinquency rate from its peak is low.” The IMF recommended that authorities take active measures to manage potential debt default risks related to real estate finance.

The local financial authorities are also closely monitoring PF-related risks in the second-tier financial sector in South Korea. The securities firms, savings banks, and mutual finance firms that recently offered outsized PF loans for high-yield profits are experiencing a sharp increase in delinquency rates. A financial regulator said that there is widespread concern about real estate PF, and the government is taking financial support measures at a national level.”