The Experience of South Koreain Asian Financial Crisis

Tomia Labachyan

Michael Zeng

JaeYong Choi

Agenda

During the Crisis2

After the Crisis3

Before the Crisis1

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

foreign loans could be fund everywhere, especially from Japan

and US

Government’s 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 borrowing foreign loans denominated in foreign currency at

lower rate then lending to large local firms at higher rates. 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 manufacturing (%)

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 sector—due to depreciation of currency and

high interest rate• Real GDP shrank 8.1% in the third quarter of 1998• Rising unemployment—up to nearly 9%• Exhausting foreign reserves—less 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% Korea’s 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 policy—severely 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 so

urces

-deregulating foreign ownership of Korean equity and simplifying stock market transactions

• Labor Adjustment--Triparitite Agreement in 1998—reduced 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

DAEWOOMotors

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 The US (Clinton)(Clinton) KoreaKoreaPressur

e

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 outflowBAITBAIT

What are the Problems about IMF in Korea ? - 2

The US The US (Clinton)(Clinton)

KoreaKorea

J.P J.P MorganMorganCiti BCiti B

ankankChase Manhattan

Another Another BankBank

IMF, IMF, IBRDIBRD, , ADB 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 didn’t 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 ?

CHINACHINA Korea Korea

Foreign Fund

Loan

The US

JAPANJAPAN

1. Long stagnation,2. Weak Leadership of Asia.

1. Financial Advantage2. Protect U.S Bank from the Asia Crisis3. Antipathy from the Asia Countries

1. Financial Advantage2. Support other Asia

AMF

Discuss

Thank You!

Questions ???