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The Experience of South Korea
in Asian Financial Crisis
Tomia Labachyan
Michael Zeng
JaeYong Choi
Agenda
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
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
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
economy
• Devaluation of Won by 25% n late Nov 1997 and by 50% of precrisis 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 “nonmarket 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
sources
-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?
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
M & A and Big Deal
LG Semiconductor -> Hyundae Electronic
Hyundae Telecom -> LG Telecom
<Bank M & A>
KookMin = KookMin + Housing
ShinHan = ShinHan + ChoHung + LG Card
Woori = Woori + PyungHwa
Hana = Hana + Seoul, Citi = Citi + Hanmi
Selling Companies to
Foreign Companies
Motors
DAEWOO
Motors
2. Sacrifice of the Employees
Returning Salary
Unemployment
1.
2.
3.
4.
Many Employees were retired (more than 20%)
Returned their salaries
Reduced their salaries
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
(Clinton)
Pressure
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
Bank
BAIT
Easy to get Investment from the Foreign Countries
However it caused the panicky outflow
What are the Problems about IMF in Korea ? - 2
The US
(Clinton)
$$$
Proposal
IMF,
IBRD,
ADB
Korea
11.28.97
High Interest
+ Principal
Mexico
Brazil
No Interest
+ 30% 0FF
The Principal
Another
Bank
Citi
Bank
J.P
Morgan
Chase
Manhattan
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 ?
Loan
Foreign Fund
CHINA
Korea
1. Long stagnation,
2. Weak Leadership
of Asia.
1. Financial Advantage
2. Support other Asia
The
US 1. Financial Advantage
2. Protect U.S Bank from
the Asia Crisis
3. Antipathy from
the Asia Countries
JAPAN
Discuss
Thank You!
Questions ???