The Experience of South Koreain 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 Agenda
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 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 manufacturing (%)
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 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
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 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
Data and Charts After the Crisis 3. After the Crisis
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 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 M & A and Big Deal Selling Companies to Foreign Companies DAEWOO Motors Motors 2. Sacrifice of the Employees • Many Employees were retired (more than 20%) • Returned their salaries • Reduced their salaries • Harmonized Labor and Management Returning Salary Unemployment
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
Korea What are the Problems about IMF in Korea ? - 1 The US (Clinton) Pressure 6.20.96 <Memo> from the Ministry of Finance • Should Do these for becoming the member of OECD • Open Korean Bond Market • Make easier to Buy Korean Stocks for Foreigners • Make easier to loan the Korean Corporation from the Foreign Bank Easy to get Investment from the Foreign Countries However it caused the panicky outflow BAIT
Another Bank J.P Morgan Korea Citi Bank Chase Manhattan What are the Problems about IMF in Korea ? - 2 $$$ Proposal IMF, IBRD, ADB The US (Clinton) 11.28.97 High Interest + Principal Mexico Brazil No Interest + 30% 0FF The Principal
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”
AMF Korea The US Who Got the Advantage from the Asia(Korea) Crisis ? Loan Foreign Fund JAPAN CHINA • Financial Advantage • Support other Asia 1. Long stagnation, 2. Weak Leadership of Asia. Discuss • Financial Advantage • Protect U.S Bank from • the Asia Crisis • 3. Antipathy from • the Asia Countries
Thank You! Questions ???