A sharp rise in government bond interest rates and an exchange rate exceeding 1,400 won, a double negative factor… IMF forecasts Korea’s growth rate at 2.3% [한강로 경제브리핑]

◆The exchange rate exceeded 1,400 won due to the rise in U.S. Treasury yields, and KOSPI plummeted.

As international oil prices rose due to the conflict between Iran and Israel, and U.S. consumption showed a strong trend, the interest rate on 10-year U.S. Treasury bonds hit its highest level in about five months. The market appears to have judged that the U.S. base rate cut will be later than originally expected. As uncertainty surrounding interest rate cuts expanded, the domestic financial market was turbulent, with the won-dollar exchange rate exceeding 1,400 won during the day and the KOSPI index plummeting by more than 2%.

On the 15th (local time) in the New York Stock Exchange, the interest rate on 10-year U.S. Treasury bonds reached 4.63%, up 2.89 percentage points from the previous day, reaching the highest level since November of last year. The 10-year U.S. Treasury bond yield serves as a reference point for global long-term market interest rates.

The rise in the 10-year U.S. Treasury yield means that financial market participants have reduced their ‘bets’ on the extent of the Federal Reserve’s base interest rate cut this year. This is because retail sales, a measure of U.S. consumption, have increased more than expected, continuing the economic boom, and rising tensions in the Middle East have led to concerns about inflation, lowering expectations of a base interest rate cut.

As expectations for a base interest rate cut in the United States receded, the won-dollar exchange rate in the foreign exchange market on the 16th opened at 1,389.9 won, up 5.9 won, and touched 1,400 won around 11:30 am. It has been about 17 months since the won-dollar exchange rate exceeded 1,400 won intraday on November 7, 2022 (high intraday price 1,413.5 won).

Thanks to the foreign exchange authorities’ verbal intervention this afternoon, saying, “We are closely watching exchange rate movements, foreign exchange supply and demand, etc. with special vigilance,” it gave back some of the gains and closed at 1,394.5 won.

KOSPI closed at 2609.63, down 2.28% from the previous day. The decline today is the largest in three months since January 17 (2.47%). Foreigners sold a net worth of 274.7 billion won on this day, showing a selling advantage for two consecutive days.

◆IMF maintains Korea’s growth rate at 2.3% this year… In the United States, it was adjusted upward to 2.7%.

The International Monetary Fund (IMF) maintained Korea’s economic growth rate forecast for this year at 2.3%. For the United States, it was revised upward to 2.7%, up 0.6 percentage points from the previous figure, reflecting better-than-expected growth.

According to the Ministry of Strategy and Finance, the IMF announced the ‘April Economic Outlook Report’ containing these details on the 16th (local time).

The IMF predicted Korea’s growth rate this year to be 2.3%, maintaining the same level as its January forecast. This is a higher level than the government, the Organization for Economic Cooperation and Development (OECD), the Korea Development Institute (KDI) (2.2%), and the Bank of Korea (2.1%).

The IMF forecast this year’s global economic growth rate to be 3.2%, reflecting falling prices and solid private consumption, raising it by 0.1 percentage points compared to January.

In particular, it was predicted that the U.S. economy would grow by 2.7% this year. This is a significant increase from the January forecast of 2.1% and is higher than last year’s US growth rate (2.5%). The IMF said, “It reflects the better-than-expected growth recorded last year.”

In addition, China’s rate was 4.6% and Japan’s rate was 0.9%, which remained the same as the previous forecast. Germany (0.2%) and France (0.7%) each adjusted their forecasts downward by 0.3 percentage points compared to January, considering worsening consumer sentiment.

◆Taeyoung Construction major shareholders receive 100:1 free capital reduction… Capital expansion worth 1 trillion won

Taeyoung Construction, which is in the process of a corporate structure improvement project (workout), is seeking to expand capital worth 1 trillion won by promoting free capital reduction for major shareholders at a 100:1 ratio.

Taeyoung Construction’s main creditor bank, Korea Development Bank, announced that it held a steering committee meeting on the 16th and explained the draft corporate improvement plan containing the above contents to 18 creditors.

At this meeting, discussions were held on measures to improve financial structure, such as capital reduction and equity-to-equity conversion, and future normalization plans based on the results of profit/loss, finance, and liquidity estimates, including the project financing (PF) business plan. The corporate improvement plan includes measures to expand capital and provide new credit to promote the normalization of Taeyoung Construction’s management.

According to Korea Development Bank, the corporation that conducted due diligence on Taeyoung Construction estimated that an equity-to-equity conversion worth 1 trillion won was necessary to fundamentally resolve complete capital erosion. To this end, the Korea Development Bank proposed a plan to differentially reduce the amount by 100 to 1 for TY Holdings, the major shareholder, and 2 to 1 for other shareholders. After the reduction, TY Holdings’ stake in Taeyoung Construction is expected to drop from the existing 27.8% to the single digit range. However, as it participates in large-scale capital expansion, management rights over Taeyoung Construction are expected to be maintained.

The scale of capital expansion, including equity-to-equity conversion, is expected to be around 1 trillion won. As of the end of last year, Taeyoung Construction’s total capital was -635.6 billion won, and as it is in a state of complete capital erosion, large-scale expansion is needed.

To this end, creditors are considering converting about 300 billion won, or 50% of the unsecured claims, into equity. The remaining 700 billion won or more will be made up through the participation of major shareholders. First, TY Holdings decided to convert 100% of the 400 billion won it had borrowed from private equity fund Kohlberg Kravis Roberts (KKR) to Taeyoung Construction into equity.

After the workout began, it was decided to discuss converting the approximately 330 billion won invested into Taeyoung Construction into perpetual bonds through funds from the sale of Taeyoung Industries.

KDB said, “Major shareholders plan to dramatically improve the financial structure by converting 100% of existing bonds, including loans, into equity, and financial creditors convert 50% of unsecured bonds into equity,” and added, “Major shareholders will invest all of their bonds into capital expansion, thereby contributing to normalization.” “We plan to fulfill our responsibilities and minimize losses to stakeholders, including financial creditors,” he explained.

Senior Reporter Kim Soo-mi [email protected]

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