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S Korean rating won't rise

South Korea's sovereign debt rating won't be raised unless the government sells stakes in banks, reduces the power of large business groups and simplifies regulations, Standard & Poor's said.

"Our rating on Korea is still `BBB+' because of a number of structural constraints still in place," Michael Petit, a Tokyo- based managing director at Standard & Poor's, told a seminar in Seoul. "Full privatization of the banking sector would ensure the upgrade of Korea to an `A' category."

To win a rating upgrade, South Korea needs to sell stakes in lenders such as SeoulBank, Hanvit Bank and Chohung Bank and reduce the "large concentration of economic power" held by business groups such as LG and Samsung, known as chaebol, Petit said.

The South Korean government has spent 156 trillion won (US$123 billion) bailing out banks, insurers and other financial companies since the 1997-1998 Asian financial crisis. While the economy is now one of Asia's fastest-growing, the government hasn't completed plans to separate itself from the financial industry.

"S&P made a valid point," said Michael Kurtz, an economist at Bear Stearns Asia Ltd in Hong Kong. "At the same time, there are lot of other features that are helping motivate a re-rating of Korea," such as improved corporate governance, he said.

The government seized SeoulBank to avert the bank's collapse during the Asian financial crisis of 1997-1998 and has since missed 10 self-imposed deadlines to sell the lender. Deutsche Bank AG quit talks to buy the lender, and HSBC Holdings Plc withdrew an offer.

Finance Minister Jeon Yun-churl said earlier this week that four local and overseas investors have shown interest in buying the bank, whose first-quarter profit rose 89 percent.

"I'm pretty optimistic that Korea will push for bank sales," Bear Stearns' Kurtz said.

Standard & Poor's raised South Korea's sovereign rating last November for the first time in two years, citing government progress in selling assets such as Daewoo Motor Co and Korea Tobacco & Ginseng Corp.

Another rating upgrade will also hinge on improvements to South Korea's financial regulations, Petit said.

"Regulations remain far-ranging, complex and subject to interpretation, and this hinders investment, structural adjustments and market-driven growth," he said.
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