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					The Experience of South Korea
in Asian Financial Crisis

                     Tomia Labachyan
                     Michael Zeng
                     JaeYong Choi

     1   Before the Crisis

     2   During the Crisis

     3   After the Crisis

     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
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

• 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
Growing Danger Before Crisis - 1

 • External debts

 • Increase in D/E
 ratios in manufactur
    ing (%)
Growing Danger Before Crisis - 2

• 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.
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
 • 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
    -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
The Possible Causes of Crisis in S.Korea

 • Over-expansion, over-production, and over cross sector
 • Inadequate financial supervision and regulation and inefficient
   use of capital
 • Currency and maturity mismatch
 • Crawling peg currency regime
 • Over government interventions?
4. Different View of the Korea Crisis

 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
How could Korea recover the crisis fast - 1

   1. Restructuring                                   LG Semiconductor -> Hyundae Electronic
                                                      Hyundae Telecom -> LG Telecom

                           <Bank M & A>
                           KookMin = KookMin + Housing
    M & A and Big Deal
                           ShinHan = ShinHan + ChoHung + LG Card
                           Woori = Woori + PyungHwa
                           Hana = Hana + Seoul, Citi = Citi + Hanmi

   Selling Companies to             Motors                  DAEWOO
   Foreign Companies                                        Motors

    2. Sacrifice of the Employees

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

   3. Campaign for Gathering Gold

   Participation : 3,500,000 People
   Total Gold : 225t (496,034 lbs)
   Total Amount : $2.1Billion

    4. Character of Korean

     Diligent, Hot Temper, Patriotism
     Like to do Fast (Impatient)
     Like to gather when some
                 issue occured

    5. Targeting of the IT Business
What are the Problems about IMF in Korea ? - 1

 The US                  Pressure
 (Clinton)                                              Korea

          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

              Easy to get Investment from the Foreign Countries
              However it caused the panicky outflow
What are the Problems about IMF in Korea ? - 2

              Proposal                         $$$
  The US                                                   IMF,
                              Korea                        IBRD,
              11.28.97                                     ADB

                               High Interest
                               + Principal       Another
                                                 Citi     Morgan
  Mexico      No Interest                       Bank
              + 30% 0FF                                 Chase
   Brazil     The Principal                             Manhattan
What are the Problems about IMF in Korea ? - 3

                        Martin Feldstein (Professor of Harvard)
Same Policy from
                        “Korea didn’t need to follow the High
Other countries’ case
                        Interest & Retrenched Finance Policy”

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

                        Henry Kissinger (Ex the Secretary of State)
                        “This Crisis was Tolerable Risks”
 Too Strict Policy      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 ?

               Foreign Fund                    Loan

    CHINA                      Korea                      JAPAN

1. Financial Advantage                            1. Long stagnation,
2. Support other Asia                             2. Weak Leadership
                                                     of Asia.

    The                              Discuss
    US 1. Financial Advantage
          2. Protect U.S Bank from
             the Asia Crisis
          3. Antipathy from
             the Asia Countries
Thank You!

Questions ???

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