Sun Ho Choi, Soon Sam Kang

1
Financial Crisis In Korea

• Sun Ho Choi, Soon Sam Kang
• Ki Seok Yang, Sang Jun Yeo

2
Overview

• Introduction
• Causes of the Crisis
• Policy Response
• Policy Lessons

3
I. Introduction

• Background (Until 1997)
• After Korean war, Economic growth like miracle
  after 1960s.
• Koreas Growth rate surpassed 7
• Inflation remained at moderate levels
• Domestic saving increasingly financed the rapidly
  rising investment rate

4
II. Effects of the Crisis

• Recession and terms of trade deterioration
• Corporate Bankruptcy
• Banking Crisis
• Contagion from foreign currency crises
• Currency crisis

5
II. Effects of the Crisis

• Recession and terms of trade deterioration

GDP
Q. Deterioration?
8.0

• The structure of
• Korean Economy Problem
• Inventories up,
• Demand down
• Cause production cost

4.8
1994 1995 1996
6
II. Effects of the Crisis
Major Economic Indicators in Korea around 1997
1993 1994 1995 1996 1997 1998
GDP growth rate 1) () 5.7 8.4 8.2 4.8 2.4 -7.1
CPI (rate of change, ) 4.8 6.3 4.5 4.9 4.4 7.5
Current account (bill. US) 1.0 -3.9 -8.5 -23.0 -8.2 40.3
Unemployment rate () 2.9 2.5 2.1 2.0 2.6 7.0
Budget balance/GDP 2)() 0.08 0.53 0.45 0.03 -0.02 -2.97
7
II. Effects of the Crisis

• Corporate Bankruptcy

• the chaebols (Korean big business groups) went
  bankrupt. 
• The portion of non-performing loans
• In total loans of banks rose
• from 4.1 percent at the end of 1996
• to 6.0 percent at the end of 1997. 

8
II. Effects of the Crisis

• Banking Crisis

• Under these circumstances,
• the Thailand Baht suddenly plummeted on July,
  1997
• signaling the beginning of currency crises
• in South East Asian countries.
• gt No longer loan from abroad

9
II. Effects of the Crisis

• Currency crisis

• The nation's stock of foreign reserves
• was rapidly depleted
• Financial institutions failed to recover
• credit-worthiness. 
• In consequence,
• the Korean government asked
• the International Monetary Fund for emergency
  credits.
• (IMF)

10
II. Effects of the Crisis

• Check Point Korean Economy in 1997

• Overinvestment
• Excessive competition, Expand Area.
• More and more, low profit
• Maturity Mismatches
• gt No choice, firms rely on short term foreign
  debt.
• Lack of Disciplines
• gt Rapidly change but over control

11
II. Effects of the Crisis

• External shocks were weaker, but their effects
  were much stronger

External Internal
Unstable international oil prices Turmoil in the international financial market World-wide economic recession Bad harvest Political and social unrest
12
III. Policy Response

• Methods molded after general IMF crisis
  resolution (Stand-by Agreement)
• Macroeconomic stabilization policy Restructuring
  policy
• Microeconomic Structural adjustment Policy
  Structural Adjustment Policy by two stages

13
III. Policy Response

• Macroeconomic stabilization
• Goals
• Restriction of domestic demand and
  expenditure-switching
• Preventing capital inflows
• Correct the balance of payment deficits
• Exchange rates were allowed to depreciate freely
  and reflect market forces fully
• Money market rates were raised sharply to control
  the inflationary impact of won depreciation

14
III. Policy Response

• Microeconomic Structural Adjustment
• Goal
• Resolve structural problems in each market
• Establish the institutional Setting for a well
  Functioning market mechanism
• Two stages
• First Establishing basic institutions needed for
  smooth operation of a market economic system
• Second Improving the management and governance
  of firms and banks through their initiatives

15
III. Policy Response

• First, Institution
• three existing financial supervisory agencies
  into one agency
• The Financial Supervision Commission
• Expanded the function of Korea Deposit Insurance
  Corporation (KDIC).
• Establishing Korea Asset Management Corporation
  (KAMCO) to dispose of non-performing loans.

16
III. Policy Response

• Amended Bankruptcy law provisions
• Eased MA restrictions
• Strengthened disclosure requirements for
  accounting information
• Introduced measures to improve corporate
  governance
• Provided better monitoring and supervision of
  corporate or bank managers
• Devised measures to restrain over-borrowing by
  firms
• Government forced extremely troubled banks to
  exit the market
• Used public funds to buy non-performing loans
• Allowed main creditor banks lead the debt workout
  programs resolved delinquent firms

17
III. Policy Response

• Second, Improving management and governance
• Includes efforts to correct problems in the
  financial, enterprise, labor, and public service
  sectors.
• Addresses issues of regulating the undesirable
  behavior of economic agents, like moral hazards.
• Adopting the global accounting standards
• Strengthening the rule of law

18
IV. Policy Lesson

1. Problems intrinsic to the economic system should
   be cured fundamentally to prevent recurrence
2. Fixed or managed fixed exchange rates can be
   dangerous
3. Strengthen financial systems against external
   financial shocks
4. Deliberate approach on financial liberalization
5. Proper post-crisis resolution policies by a
   competent government is important