□ Benefitting from implicit government guarantees, Korean state-owned enterprises (SOEs) can readily expand their debt at an interest rate as low as sovereign bonds regardless of their ability to repay. In this scenario, Korean SOEs stand vulnerable to ‘double moral hazards’: SOEs have little incentive to improve their financial structure, and the government has a large incentive to assign popular but unprofitable projects to SOEs. In recognition of this, the government should formally acknowledge SOE debt as the ‘national guaranteed debt’ in order to ensure official supervision and regulation. In addition, the government needs to improve SOE debt structure by introducing capital regulation and bail-in bonds.

- KNOC slipped into a state of capital shortfall in 1H 2020.

- In the era of low birth rates and population aging, the financial structure of other SOEs expects a deteriorating trend to persist as well.

- This study reveals that ‘implicit guarantees’ by the government lead to heavier debt for SOEs and recommends remedies to improve the Korean SOE debt problem.

- Compared to their counterparts in the major countries, Korean SOEs have exceptionally high levels of debt.

- For financing public projects, Korea is more reliant on SOE debt than on its government debt.

- Korea’s public enterprises raise debt mainly by issuing bonds.

- Unlike bank loans requiring collateral, SOEs can issue bonds only with good credit ratings, which makes it an accessible tool to expand the debt.


- Public corporations on the brink of default can still debt-finance at a large scale at an interest rate as low as government bonds, thanks to the possibility of sovereign support.

- Owing to implicit guarantees by the government, SOEs can benefit from an interest rate lower than private ones in issuing bonds, and the resulting discount rate effect is around four trillion won per year.

- No matter how weak their fundamentals are, Korea’s public enterprises can borrow money at an interest rate 0.20%p lower than leading domestic private companies.

- Implicit guarantees by the government could lead to double moral hazard on the sides of public enterprises and government.

- First, public enterprises lack incentives to better know their fundamentals.

- Second, occasionally the government assigns infeasible projects to SOEs and mandates their execution by debt financing at a low-interest rate.

- Consequently, public enterprises end up accumulating debt on the one hand and debt capacity exhausted on the other.

- Government-guaranteed obligations need to incorporate SOE debt predominantly incurred by their bond issues, and there should be a fee for the service of a riskbased guarantee.

- Capital regulation on SOEs should be introduced to maintain financial soundness systematically.

- The disciplines on SOEs should be restored by introducing bail-in bonds where creditors share losses in case of emergencies.