The Experience of South Korea

in Asian Financial Crisis

Tomia Labachyan
Michael Zeng
JaeYong Choi
Agenda
During the Crisis
2
After the Crisis
3
Before the Crisis
1
4
Different View of the Korea Crisis
1. Before the Crisis
Near 40 years
of impressive
economic growth
promoted by the
industrial policies

One of the fastest
growing economy
in the world

The Factors That Contributed To The Growth
Some Internal Factors:
Government policies
Skilled and Unskilled Workers
Investment in physical capital and R&D
Rapid growing conglomerates (Chaebols) such as Deawoo

Some External Factors:
Expanding world markets for Korean products
Low funding costs from international money markets: cheap for
eign loans could be fund everywhere, especially from Japan
and US

Governments Role in Pre-crisis Growth

Over optimistic about future market conditions-perception based
on the past performance

Over expansion, over production, and over cross-sector
investments

Over borrowing from domestic banks and from foreign capital
markets, particularly short term loans

Growing potential liquidity problem in banking industry:
borrowing foreign loans denominated in foreign currency at
lower rate then lending to large local firms at higher rates.
The Main Source of Funding-Banks
Relative underdeveloped equity markets and bond markets

External debts





Increase in D/E
ratios in manufactur
ing (%)

Growing Danger Before Crisis - 1
Increasing numbers of failure in local firms
HanBo Steel defaults on its loans in Jan, 1997
Too much debts 500% D/E ratio of 30 major conglomerates
Difficulties of repaying debts
Increasing difficulty for merchant banks to rollover short term loans

With seemingly strong fundamentals and long period of impressive
growth, South Korea was believed, by many people, that it would be
able to withstand the crisis when the crisis spread over to other
countries in South East Asia. The world as well as its citizens were
shocked when South Korea announced to seek the assistance of
the IMF in meeting its foreign debts.



Growing Danger Before Crisis - 2
2. During the Crisis
Huge drop in foreign loans-loans from Japan dropped from
$21.9 billion at the end of 1996 to $8.8 billion by the end of 1997
Widespread withdrawal of loans
Failures of firms-illiquidity in banking sector-spillover to whole
economy
Devaluation of Won by 25% n late Nov 1997 and by 50% of pre-
crisis level after the announcement on Dec 4, 1997
Rising interest rate--over night call rate up to 25%
Crushed banking sectordue to depreciation of currency and
high interest rate
Real GDP shrank 8.1% in the third quarter of 1998
Rising unemploymentup to nearly 9%
Exhausting foreign reservesless than $6 billion left
Seeking assistance of the IMF



Data and Charts During the Crisis - 1
Data and Charts During the Crisis - 2
Recovery From Crisis - 1
The Unprecedented IMF standby loan on Dec 4, 1997 size as
large as 13% Koreas GDP (minimal immediate effect)
Restoring confidence in currency market without using non-
market solutions
*discussion with private creditors on rescheduling of short
term debt
In January 1998, the Korean government converted $24 billion
of short term private debt into claims of 1-3 year maturities
government guarantees. It restored confidence in foreign
exchange market and Won stopped falling.
Implementing tight monetary policyseverely reduced
domestic investment and personal consumption-rising liquidity
position-current account surplus of $50 billion (12% of GDP)-
reduced foreign debt by $34 billion by Dec 1998
Recovery From Crisis - 2
Restoring credit market confidence by announcing full
government deposit guarantees for all financial institutions, by
nationalizing commercial banks, and by pressuring the
commercial banks to roll over all existing debt of small and
medium size firms until the end of 1998
Encouragement to lend to small and medium size firms
Capital market development-providing a diversified funding
sources
-deregulating foreign ownership of Korean equity and
simplifying stock market transactions
Labor Adjustment--Triparitite Agreement in 1998reduced
labor costs and enhanced the corporate profit-faster than
expected recovery
The first one recovering from the crisis

3. After the Crisis
Data and Charts After the Crisis
Recap
The Possible Causes of Crisis in S.Korea
Over-expansion, over-production, and over cross sector
investment
Inadequate financial supervision and regulation and inefficient
use of capital
Currency and maturity mismatch
Crawling peg currency regime
Over government interventions?



12. 1997 :
Loan from IMF($19.5Bil), IBRD($7Bil), ADB($3.7Bil) = $30.2Billion

8. 2000 :
Bailout from the IMF
Due Date was 5. 2003

2007 : Foreign Exchange Holding
Top 4 - China, Japan, Taiwan, Korea
4. Different View of the Korea Crisis


How could Korea recover the crisis fast - 1


M & A and Big Deal
Selling Companies to
Foreign Companies
Motors
<Bank M & A>
KookMin = KookMin + Housing
ShinHan = ShinHan + ChoHung + LG Card
Woori = Woori + PyungHwa
Hana = Hana + Seoul, Citi = Citi + Hanmi
DAEWOO
Motors
LG Semiconductor -> Hyundae Electronic
Hyundae Telecom -> LG Telecom
1. Restructuring


Returning Salary
2. Sacrifice of the Employees


Unemployment
1. Many Employees were retired (more than 20%)
2. Returned their salaries
3. Reduced their salaries
4. Harmonized Labor and Management
How could Korea recover the crisis fast - 2


Participation : 3,500,000 People

Total Gold : 225t (496,034 lbs)

Total Amount : $2.1Billion


Diligent, Hot Temper, Patriotism
Like to do Fast (Impatient)
Like to gather when some
issue occured
3. Campaign for Gathering Gold
4. Character of Korean
5. Targeting of the IT Business
What are the Problems about IMF in Korea ? - 1
The US
(Clinton)
Korea
Pressure
6.20.96 <Memo> from the Ministry of Finance


Should Do these for becoming the member of OECD
1. Open Korean Bond Market
2. Make easier to Buy Korean Stocks for Foreigners
3. Make easier to loan the Korean Corporation from the Foreign
Bank


Easy to get Investment from the Foreign Countries
However it caused the panicky outflow
BAIT
What are the Problems about IMF in Korea ? - 2
The US
(Clinton)
Korea
J.P
Morgan
Citi
Bank
Chase
Manhattan
Another
Bank
IMF,
IBRD,
ADB
Proposal
$$$
High Interest
Mexico
Brazil
+ Principal
No Interest
+ 30% 0FF
The Principal
11.28.97
What are the Problems about IMF in Korea ? - 3
Same Policy from
Other countries case


Martin Feldstein (Professor of Harvard)
Korea didnt need to follow the High
Interest & Retrenched Finance Policy
Excessive Formula


Jeffrey Sachs (Professor of Columbia)
IMF made Investors anxious and degrade
the confidence of these countries
IMF should have change short term
loan to long term loan for helping Korea
Too Strict Policy


Henry Kissinger (Ex the Secretary of State)
This Crisis was Tolerable Risks
Martin Woolf (Columnist of FT)
Due to the tight money policy of IMF,
many Korea Companies were bankrupt
Who Got the Advantage from the Asia(Korea) Crisis ?
CHINA
Korea
Foreign Fund Loan
The
US
JAPAN
1. Long stagnation,
2. Weak Leadership
of Asia.
1. Financial Advantage
2. Protect U.S Bank from
the Asia Crisis
3. Antipathy from
the Asia Countries
1. Financial Advantage
2. Support other Asia
Discuss
Thank You!
Questions ???