South Korea BOK Warns of High Default Risks in Three Sectors

Sun Kwang Incheon Container Terminal (SICT) in Incheon, South Korea
SeongJoon Cho | Bloomberg | Getty Images
Sun Kwang Incheon Container Terminal (SICT) in Incheon, South Korea

South Korea's central bank warned on Tuesday that construction, shipping and shipbuilding companies were faced with sharply higher debt default risks than other sectors due to an extended slump in those industries.

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The Bank of Korea said the expected default frequency, which it said is a measure of chances for defaulting on debt, stood at 9.1 percent for construction companies, 8.5 percent for the shippers and 5.9 percent for shipbuilders.

"A considerable number of shipbuilding and construction companies saw their operating profits fall sharply during 2012 or turn into losses, and (some of the) shipping firms posted losses for a second consecutive year," it said in a report.

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These compare with the expected debt default frequency rates of between 1.2 percent and 3.2 percent for the other sectors included in the analysis, it said in the scheduled report on the health of the local financial system.

An official at the central bank said a company measured for an expected default frequency rate of 35 percent would most likely default on debt.

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The central bank said the overall financial system in Asia's fourth-largest economy was healthy, but added weak companies in these industries need to be put through "bold restructuring" to prevent a spreading of instability on the markets.