Credit ratings experts from S&P Global Ratings and NICE Investors Services answer questions during a press conference held at Fairmont Ambassador Seoul Hotel in Seoul, Wednesday. Korea Times photo by Anna J. Park

Looming threats from both domestic and global real estate project financing are expected to be the greatest challenges facing the Korean economy next year, experts from credit rating agencies S&P Global Ratings and NICE Investors Service said Wednesday.

During a joint press conference held by the two companies in Seoul's financial district of Yeouido earlier in the day, the experts pointed out that insolvencies in some loans for real estate project financing held by secondary financial institutions, such as brokerages, capital firms, real estate trusts and savings banks, will start to surface next year, posing great risks to firms that have a high exposure to the real estate sector.

"Next year's credit rating outlook for the securities, capital, real estate trusts and savings banking industries is shown to be negative, due mainly to growing potential risks related to real estate project financing as well as their lowered profitability amid asset price corrections," Lee Hyuk-joon, FI ratings division director at NICE Investors Service, said during the press conference.

"In terms of scale and content, there hasn't yet been a significant reduction this year in real estate risks. Most bridge loans have only been extended for longer maturity, rather than being recovered. Thus, securities firms, capital firms and savings banks that maintain high-risk exposures to bridge loans are expected to show poor performance next year."

He warned that some of these secondary financial institutions with a weak competence in drawing necessary external capital bear the risk of their major shareholders being replaced, if the potent risks related to real estate project financing are realized.

The banking, life insurance, non-life insurance and credit cards industries, on the other hand, are estimated to remain stable throughout next year, as their business models are better suited for high interest rate conditions, and also they have much lower exposure rates to real estate project financing.

Kim Dae-hyun, S&P Global Ratings' director of the Financial Services Ratings group in Asia-Pacific, shared a similar take on the issue. He said insolvency in real estate project financing may occur, given that the current high interest rate is likely to continue for the time being, and it stands to affect mostly non-banking sectors.

"Although the banking sector of Korea is expected to suffer a worsening financial soundness next year amid the country's high household debts and real estate conditions, it is expected that their soundness will not deteriorate significantly enough to damage their credit ratings, considering the appropriate underwriting and risk management of Korean banks," Kim said, highlighting that securities firms and savings banks have been shown to be vulnerable due to their exposure to real estate project financing risks, including bridge loans.

Credit ratings experts from S&P Global Ratings and NICE Investors Services deliver presentations during a press conference held at Fairmont Ambassador Seoul Hotel in Seoul, Wednesday. Korea Times photo by Anna J. Park

Ki Tae-hoon, director of the ratings policy division at NICE Investors Service, also pointed out that the Korean economy's growth momentum could somewhat slow down next year, with lowered corporate credit ratings in general.

"The number of domestic companies whose credit ratings saw improvement has been slashed down by 45 percent, as of November this year, compared to a year ago, showing a stronger downward pressure. The financial sector is particularly showing a negative-inclining credit rating tendency, compared to non-financial industries," Ki said.

By sector, memory chips, cars, secondary batteries and shipbuilding are expected to enjoy improved market conditions next year, while petrochemicals, steel, construction, displays and shipping are facing a deteriorated business environment.

Louis Kuijs, S&P Global Ratings' Asia-Pacific chief economist, meanwhile, forecasts that interest rates won't start to come down until the second half of next year, and the move will be restrictive.

Regarding the Korean economy, Kuijs told The Korea Times that Korea's economic outlook remains one of the most robust in the Asia-Pacific region for the short term, yet in the long term, the economy may face increased hurdles as the global economy heads towards more fragmented blocks.

S&P projects Korea's GDP to grow by 2.2 percent in 2024, with its consumer price index (CPI) to increase by 2.6 percent. Korea's sovereign credit rating stands at AA with a stable outlook.