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International Business – Trimester 5
Why Did the Korean Won Collapse?
Group 2:Biju Sebastian 22Chetan Gulati 27Deepak Uppal 30Devansh Bansal31Jachak Ajit 45
11th Dec 2010
International Business – Trimester 5
Agenda
About Korea SouthAbout Won, ChaebolsCase SummaryBandwagon EffectKorea Today
Page 3International Business – Trimester 5
About South KoreaRepublic of Korea with capital Seoul Independence 15 August 1945 (from Japan) Population 48,87500 ,Density 491/km2 GDP2010 estimate -
Total $986.256 billion Per capita $20,165
Gini (2007) 31.3 (low) HDI (2010) 0.877 (very high) (12th)Currency South Korean won (₩) (KRW) Major economy, a full democracy and a regional power in East
Asia. The economy is export-driven, with production focusing on
electronics, automobiles, ships, machinery, petrochemicals and robotics
Page 4International Business – Trimester 5
About South Korea• Age structure:
– 0-14 years: 16.8% (male 4,278,581/female 3,887,516)– 15-64 years: 72.3% (male 17,897,053/female 17,196,840)– 65 years and over: 10.8% (male 2,104,589/female 3,144,393) (2010 est.)
• Exports -$373.6 billion – China 21.5%, US 10.9%, Japan 6.6%, Hong Kong 4.6% (2008)
• Imports-$317.5 billion (2009 est.)– China 17.7%, Japan 14%, US 8.9%, Saudi Arabia 7.8%, UAE 4.4%, Australia 4.1% (2008)
• Reserves of foreign exchange and gold: • $270 billion (31 December 2009 est.)• Debt - external: $370.8 billion (31 December 2009 est)
Page 5International Business – Trimester 5
About South Korea
Gyeongbokgung royal palace in northern Seou
Great Southern Gate
Bridge of No Return National.Assembly
Page 6International Business – Trimester 5
Korean Currency History
Japanese invasion of Korea
Return of Won as Korea gained Independence
Devaluation of Won ( 1$ = 6000 Won) due to Korean war which ended in 1953. Hwan introduced at 1 hwan = 100 won
hwan suffered from inflation as well (1$ = 1250 Hwan)
Date introduced
Value of $
June 10, 1962 125
May 3, 1964 255
August 3, 1972 400
December 7, 1974
480
January 12, 1980
580
Pegging of Won
Floating on Dec 24,
1997 - East Asian financial crisis
Page 7International Business – Trimester 5
1 U.S. dollar = 1 142.85714 South Korean won – Today
Won depreciation - Negative impact on the South Korean economy, which is heavily dependent on large imports of capital goods and energy.
Won appreciation - in 1999 and 2000, was the result of a gradual economic recovery, contributed to the recovery itself by decreasing the cost of imported goods and fuel.
Korean Currency History continue…
Page 8International Business – Trimester 5
Chaebol•The Korean word “chaebol “means "business family" or "monopoly" and is often used the way "conglomerate" is used in English
•The chaebol are the large, conglomerate family-controlled firms of South Korea characterized by strong ties with government agencies.
•They are powerful global multination owning numerous international enterprises.
•There are several dozen large Korean family-controlled corporate groups which fall under this definition. Through aggressive governmental support and finance, some have become well-known international brand names, such as Samsung, Hyundai and LG.
•The chaebol has also played a some significant role in South Korean politics.
•Some chaebol are one large corporations, while others have broken up into loosely connected groups of separate companies sharing a common name. Even in the latter case, each is almost always owned, controlled, and/or managed by the same family group
•chaebols controlled by the owner's family or the largest shareholders
Page 9International Business – Trimester 5
Economic Perspective
•Investment lead economic boom in 1994-1995• Growth of Export oriented industries
Reasons
• Ambitious Political back to boost economic growth • Chaebols were encouraged to invest in new factories• Declined investment quality by Chaebols – unrealistic projections about future demand conditions• Excess capacity and falling price• Significant increase in risk of corporate bankruptcy
Case summary
Page 10International Business – Trimester 5
Case summary continue…
Financial Perspective
Won lost around 67% of value in 1997Massive $ 55 billion rescue package in
Back ground
•Built up massive debt by Chaebols •Much of borrowing in USD instead of Korean Won – Due to stable Dollar / Won exchange rate and lower interest rate for Dollar borrowing
• Risks• Currency depreciation would raise borrowing cost• May deperess corpoarte earning• Increase risk of Bankrupcy
Page 11International Business – Trimester 5
Case summary continue …
Roller cost impact in 1997
• Foreign investors are alarmed at rising debt level of South Korean companies• Korean companies were not able to service their debt payment• Foreign investors started withdraw their money from Korean stock and bond market – They sold Korean won and started purchasing Won• Increased supply of Won and increased demand of USD pushes exchange rate • Korean central bank intervene to arrest sliding Won against USD• Due to risk of Corporate bankruptcy, Govt stated intentions to take some troubled companies• Down grade of South Koreans sovereign debit by Standard & poor’s
Page 12International Business – Trimester 5
Remarkable recovery after the 1997 Asian financial crisis
•Displayed excellence in several noted industries like shipbuilding, semiconductors, construction, digital electronics and automobiles
•Undertaking Economic reforms
•Promoting exports
•Easing regulations to help attract foreign direct investment
•Eased visa rules for foreign investors
•Established special zones in selected areas to make its environment more attractive to overseas trade and foreign investment, in a bid to become a Northeast Asian business hub
Page 13International Business – Trimester 5
Remarkable recovery after the 1997 Asian financial crisis
•Efforts to seal free trade agreements (FTAs) with its trading partner•Korea-Chile Free Trade Agreement (KCFTA) was signed in February 2003
•The Korea-Singapore free trade agreement was signed in August 2005
•Korea-ASEAN FTA was signed in late November 2007
•Korea-U.S. free trade agreement (KORUS FTA) on Apr. 2, 2007
•Korea-India Comprehensive Economic Partnership Agreement (CEPA), Jan. 1, 2010
•Korea-EU Free Trade Agreement (FTA), Oct. 6, 2010
•Korea has also been negotiating free trade deals with Canada, Mexico, the Gulf Cooperation Council (GCC), Australia, New Zealand, Peru, Columbia and Turkey. The groundwork is being laid for FTA negotiations with China, Japan, MERCOSUR, Russia, Israel and the South African Customs Union.
Page 14International Business – Trimester 5
Reason for recent N – S Korea Conflict
Calculated attempt by the regime to exploit divisions and extract concessions from the international community
North Korea's intention to turn this region into a conflict zone so that it can bring the concerned parties to the discussion table.
North Korean leader Kim Jong Il has been to China twice in 2010, "begging for aid" and has not received much in return. Millions of North Koreans have starved to death in the past 10 years.
North Korea has nuclear capability and tried to make a point that they should not be lightly regarded.
The ailing North Korean leader, Kim Jong-il, seeks to reassure the country as his son Kim Jong-un prepares to take over. An attempt to gain support of N Korean army and people. An attempt to prove he is brave.
Page 15International Business – Trimester 5