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The Korean Economy: Resilience Amid Turbulence October 2008 1. Macroeconomic Performance 2. Current Issues & Answers Stable GDP Growth and Downward Trend in Inflation Korea shows robust GDP growth Downward trend in consumer prices 2008 CPI – Headline (%) & WTI trend (US$) 5.0% Korea 5.3% 10 150 WTI 9 2.6% US 2.4% 8 120 7 6 2.7% EU 1.8% 5.5 5.6 3.9 3.6 3.9 90 5.1 4.9 5 4 5.9 4.1 60 3 2.3% Japan 1.1% 2 30 1 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Average GDP Growth Rate in 2006-2007 Average GDP Growth Rate in 1H08 3 Improving Current Account Surplus Diversified export products Robust export growth Exports (US$ bn, YoY Growth, %) Semiconductor 11% Others 26% Chemicals 10% 400 300 200 100 162 8.0% 194 19.8% 2002 2003 254 30.9% 284 11.8% 325 14.4% 371 14.1% 330 23.0% Textile 4% Automobile 10% Computer 5% Mobile communication 8% 0 2004 2005 2006 2007 Sep.08 Export (USD billion) Home appliance 5% Steel 6% Source: Bank of Korea Shipbuilding 7% Machinery 8% Diversified export markets Current account balance would turn to surplus in 4Q 2008 2008 Current account balance (US$ bn) Others 19.8% China 22.1% 3.5 ~ 4.0(e) Middle East 5.3% -0.13 Central & South America 6.9% -5.21 Japan 7.1% -8.5~-9.0(e) 1Q 08 2Q 08 3Q 08 4Q 08 EU 15.1% ASEAN 10.4% North America 13.3% Source: KITA, as of 2007 4 Much Room for Monetary and Fiscal Policy Much room for monetary and fiscal policy Simultaneous policy rate reduction by 7 countries Korea policy rate trend (%) Policy rate (October 8, 2008) 5.6 Country 5.2 Prior Current Change US 2.00 1.50 △ 0.50 EU 4.25 3.75 △ 0.50 UK 5.00 4.50 △ 0.50 Sweden 4.75 4.25 △ 0.50 Swiss 2.50 2.25 △ 0.25 Canada 3.00 2.50 △ 0.50 China 7.20 6.93 △ 0.27 △0.25% 5.0% 4.8 4.4 4.0 Jan/07 Jun/07 Nov/07 Apr/08 Sep/08 Source: Bank of Korea, Datastream 5 Prudent Fiscal Position Korea continues to produce fiscal surpluses Lower debt level than OECD peers Consolidated government balance (% of GDP) 4% Government net debt to GDP (%) 3.8% 3.3% 200% 3% 180.0% 2.1% 2% 180% 1.2% 1.1% 1.0% 1% 0.7% 160% 0.4% 0.4% 2005 2006 2007 2Q08 0% 2000 2001 2002 2003 2004 Source: Ministry of Strategy and Finance 120% Surplus well above its peers OECD Average: 77% 100% 80% Government surplus (% of GDP) 4 140% 2.1 66.0% 72.0% Germany France 62.0% 60% 2 40% 0 -0.4 -0.5 (2) 20% -2 -2.9 0% Korea US Japan on g (A A Sl +) ov en ia (A Po A rt ) ug al (A A Ta -) iw an (A A -) Ita ly (A +) C hi na (A +) Ic el an d (A ) ed ia n m m A H on g K A A ed ia n ) (A or ea -0.4 -0.7 -2.5 (4) K -0.3 -1.3 33.0% Source: S&P Sovereign Risk Indicator, July 2008, 2008 forecast data Source: OECD; IMF (Korea data). According to OECD, Korea’s debt to GDP ratio is 26.5% 6 1. Macroeconomic Performance 2. Current Issues & Answers Korea’s External Debt Level is Too High? Large portion of external debt comes from currency hedging by banks and exporters $144.7bn (34.5% of total) without default risk External debt structure (US$ bn) Advances for shipbuilding exports contracts 50.9 (12%) Most of short-term external debt by foreign bank Total external debt by bank (US$ bn) No risk Domestic bank 127.4 ( 61%) 83.1 (39%) Foreign bank branch Short-term external debt by bank Domestic bank Debt for hedging purposes 93.8 (22%) Source: Bank of Korea 66.0 (45%) 79.5 (55%) Foreign bank branch Source: Bank of Korea 8 Korea’s Foreign Reserves are not liquid? Korea has 6th largest foreign reserves worldwide and most of the foreign reserves are highly liquid Adequate amount of foreign reserves Highly liquid foreign reserves FX reserves (US$ bn) Total reserves (US$ bn) 270 224 199 210 239 262 264 258 239 155 178 132 96 74 86 40 103 121 Mostly AA-rated or above bonds 217.2 (90.6%) 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08 2Q08 3Q08 6th largest reserves globally (August 2008) FX reserves (US$ bn) China Japan Russia India Taiwan Korea Singapore Hong Kong 1 1,808 Deposit 22.0 (9.2%) 997 582 296 282 243 170 158 Others 0.5 (0.2%) Median of peers1: US$ 29.2bn Includes Hong Kong (AA+), Slovenia (AA), Portugal (AA-), Italy (A+), Chile (A+), Czech Republic (A) and Estonia (A). Credit ratings by S&P. Source: IMF. Bond Deposits Others Source: Bank of Korea 9 Korean Banks Have a Serious Liquidity Problem? Supported by government’s consistent and strict management, currency mismatch and duration mismatch have been minimized No currency mismatch exists High liquidity ratio: Low risk from duration mismatch 7-day maturity mismatch ratio (%) Foreign currency financing/operation - Korean banks (US$ bn, as of Jun.08) 3.1 3.0 Operation Amount Financing Amount 2.0 1.0 Forward exchange purchased (off B/S) 65.7 External debt 127.4 7-day Guidance: 0% 0.0 -1.0 Foreign loans1) 45.5 Residential deposits in foreign currency May Jul. 9/25 9/29 10/01 10/06 10/08 19.3 3-month foreign currency liquidity rate (%) Trade bill discount operation 50.5 Swap with foreign bank branches 2) 23.0 110 102.9 100 Others (Securities, deposits, etc.) 40.0 Swap with bond investors 2) (foreigners) 201.7 32.0 90 201.7 Guidance: 85% 80 May 1) NPL : 0.3%, 2) Estimates (not included in liabilities) Jul. 9/25 9/29 10/01 10/06 10/08 Loan to Deposit Ratio is Too High? Loan to deposit ratio has stayed low during recent years Moderate loan to deposit ratio Loan to deposit ratio (%) 140 130 128.2 126.5 126.8 123.7 124.2 120 105.4 110 104.2 104.6 104.2 103.2 100 90 2007 Jun. 2008 Jul. 2008 Aug. 2008 Sep. 2008 * US : 112%(Including CD, Jul 2008) Source: Financial Supervisory Service excluding CD Including CD 11 Real Estate Bubble will burst? Government’s strict DTI and LTV regulation has enhanced household finance soundness Improving loan to value ratio Dramatic growth of financial assets 1 2 LTV ratio (%) Financial surplus (KRW trn) 120 56 113 105 100 30% 80 25% 62 60 40 35% 15% 10% 0 5% (12) 2001 2002 Household Financial Surplus 0% 2003 2004 47.5 2007 1Q08 48.8 44 2005 20 2000 47.9 2006 2Q08 20% 32 (20) 49.5 48 60 54 25 52.2 52 2005 2006 Household Asset Grow th 2007 Debt Grow th Stricter regulation on mortgage than other countries Korea U.S. Hong Kong Germany Japan Mortgage/ GDP 33.4% 72.3% 37.3% 52.4% 36.2% Regulation System Direct Indirect Direct Mixed Indirect LTV Limit 40~60% - 60~70% 60% (Portion) Indirect - 60% - - DTI Limit 40% Source: Bank of Korea Financial Stability Report, April 2008 1 Financial Surplus = Financial Asset Increase - Financial Liability Increase. 2 Financial assets and liabilities exclude trade credits and other miscellaneous non-interest-bearing financial assets and debts. 12 Government Plan to Stabilize Financial Market Two of the five financial stabilization measures would be sufficient in current condition Should the need for additional steps arise, appropriate measure will be enforced Measures Policy Providing liquidity External debt guarantee Country US, UK, Germany, Australia UK Australia US Korea ● Additional US$ 30bn liquidity to be provided ● 3-year US$ 100 bn guarantee for external debt Acquisition of insolvent debt Increased Recapitalization guarantee on bank deposits US US, UK, HK, US, UK, Germany, Germany, Hungary, France Australia, Ireland There is no need for additional steps; appropriate measures will be enforced when necessary 13 Korea: The Case for Investment ● Stable GDP Growth Amidst Global Downturn Strong Fundamentals ● Downward Trend in Inflation ● Improving Current Account Surplus ● Prudent Fiscal Position ● Reasonable Amount of External Debt Stable Liquidity ● Sufficient Foreign Exchange Reserves ● Manageable Situation in Real Estate Sector ● Providing dollar liquidity to banks Governmental Measure ● Government guarantees for Korean banks’ external debt ● More proactive measures prepared 14 Korean Economy: Positive Power Drives Successfully Overcame Oil Shock ■ ■ ■ Experience in Asian Financial Crisis More than 5000-year History Tax cuts Regulatory reforms Global standards in financial sector In history, Korea has proven its power to change crisis into opportunity Trust in Korean Economy. Positive Power Drives It 15 Thank You