Financial Crisis

South Korea

Presented By:Abishek Munshi

Senthil Kumar

Agenda

▪ Backstory

▪ What brought the crisis?

▪ Consequences

▪ Recovery

▪ Current Situation

▪ Road Ahead

▪ Will History Repeat itself?

▪ Recommendation

1910 1918 1926 1934 1942 1950 1958 1966 1974 1982 1990

Japan Occupied Korea untill 1945

1910

Independence From Japan

1945

Economic Recovery

1953

Import Financed by UNKRA and UNCACK

1960

Millitary Government and Inflation Accelerated

1962

Civilian Government and Economic Reform

1966

Economic growth in Rapid Pace and New Economic Reform

1973

Return to Democracy

1980

Financial Crisis

1997

What brought the Crisis

3

Major Factors

▪ Inflation

▪ Recession in world economy

▪ Appreciation of Korean Won

1. Current Account Deficit

Policies to finance the deficit

▪ Foreign Exchange Management Act

▪ Removed certain restrictions on asset and liability management of financial institutions.

▪ Chose to liberalize short term capital inflows

Weak Prudential Supervision

1990 1995

Competitiveness

Profitability and Flow On Investment

Triggers

2. Failed to Bailout

General Notion : Financial bailout for large conglomerate whose survival has strong consequences on stability of the Economy

▪ Korean government economic policy team believed that in a economy run on market principles, the chaebol groups should stand on their own feet.

▪ The bankruptcy of Hanbo, Sammi and Jinro.

▪ Government delayed in providing bailout to KIA Motors.

▪ Inconsistency in decisions, created doubts in the mind of foreign Investors..

BUT

3. Contagion

Foreign Investors and Creditors, including USA Bank and Japan Bank, Lost Confidence due to Currency Crisis in

South Asian Currency

Leading South Korea to use its limited foreign currency thus depleting its Foreign Reserve and forcing them to

approach IMF

Consequences

▪ Moody’s downgraded the credit rating from A1 to B2

▪ Further Decline In stock Markets

▪ Big conglomerate were either sold or dissolved such as KIA motors was brought by Hyundai, Samsung Motors dissolved and Daewoo was sold to General Motors

Recovery

▪ Loan of $60 bn from IMF

▪ Financial Reforms designed to strengthen legal infrastructure

▪ 13 bills were passed

▪ Restructuring process of financial institutions, leading to dump all the non performing loans

▪ Capital account liberalization

▪ Free floating exchange rate was adopted

▪ Restrictions on M&A by foreigner was abolished

▪ Strengthen corporate governance of Financial Institution

▪ Commercial institution with more risk were closed

South Korea

Economic Investigation – Last 5 years

GDP Fluctuations:Between 4% to 6%

Current GDP :

1.305 trillion USD

Economic Investigation – Last 5 years

Investigation - Continues

Inflation, in last 5 years have fluctuated but crossed the targeting range only twice

Sizable trade and current account surplus have buttressed KOREAN WON, encouraging financial Inflows supporting Local currency

Investigation - Continues

Investigation - Continues

Foreign Currency reserves (September 2014):

355 billion USD

Investigation - Continues

South Korea

Road Ahead

Road Ahead

0

1

2

3

4

5

6

7

8

Real GDP growth Industrial productiongrowth

Gross fixedinvestment growth

Unemployment rate(av)

Consumer priceinflation (av)

Consumer priceinflation (end-period)

Short-term interbankrate

Government balance(% of GDP)

Current-accountbalance (% of GDP)

Forecast

2014 2015 2016 2017 2018 2019

Will History Repeat Itself???

• Still prone to contagion effect.

• Country is dependent on few chaebols and certain industries.

Recommendations – Policy Trend

▪ If the US increases the interest rates, current account surplus will decrease as result of outflow of Investments

▪ We recommend:

▪ “Paradigm shift", in which the economy will be driven by innovation and creativity rather than export manufacturers.

▪ Public-sector job creation and encouraging greater female participation, among other measures to boost the domestic demand

Recommendations – Fiscal Policy

▪ The government's 2015 budget proposal, finalized in September 2014, calls for boosting total expenditure by 5.7% to W376trn (US$367.9bn) in 2015, with the aim of achieving real GDP growth of 4% and inflation of 2.1%. This will not only widen Fiscal Deficit but will also rise the government debt.

▪ We Recommend:

▪ Revised down fiscal forecasts in the light of the government's spending plans and increase Tax to support the expenditure and revenue numbers (which include social security funds, such as pensions and unemployment insurance)

Recommendations – Monetary Policy

▪ The Bank of Korea, the central bank, lowered its benchmark interest rate by 25 basis points in August and by the same amount in October to 2%. wouldaggravate the already burden-some household debt situation.

▪ We Recommend:

▪ Bank Of Korea to maintain its interest rates in the first half of the 2015 before embarking on a tightening cycle as domestic demand growth quickens, creating confidence in the domestic market

Financial Crisis is a stark reminder that transparency and disclosures are essential in today’s market place

- Jack Reed

Thank You