(Dec.2009)Korean Economy

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AANN IINN--DEPTHDEPTH LLOOKOOK ATAT THETHE KKOREANOREAN EECONOMYCONOMY ANDAND

PP OLICYOLICY RRESPONSESESPONSES TOTO THETHE CCURRENTURRENT CCRISISRISIS

December,December, 20092009

Financial Services CommissionFinancial Services Commission



Table of Contents

1. Current Status of the Korean Economy and Financial Markets

. s s an a enges a se ur ng e r s s

3. Policy Responses

4. Lessons Learned



1. Current Status of the Korean Economy

an nanc a ar e s



Real Economy

Industry OutputsReal GDP Growth

(YoY growth, %)

-15

-10

-5

0

5

10

-

-40

-30

-20

-100

10

20

30 (YoY growth, %)

Retail SalesExports

4

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09Hong Kong Singapore Taiwan Korea

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09Hong Kong Singapore Taiwan Korea

(YoY growth, %)

-15

-10

-5

0

5

10

15

20

25

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09

Hong Kong Singapore Taiwan Korea

(YoY growth, %)

-50

-40

-30

-20

-10

0

10

20

30

40

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09Hong Kong Singapore Taiwan Korea



Financial Market

Comparison of Stock Price Movements Exchange Rate Changes(Local currency/USD)

20406080

100120140160180 (Jan.1, 2008=100)

20

40

60

80

100

120(Jan.1, 2008=100)

CDS premium(5yr)

5

Comparison of Money Market Rates

50

1

2

3

4

5

6

7


CD(91days, Kor)

Target Rate(Kor)

LIBOR(3M)

(%)

0100

200

300

400

500600

700

800


Malaysia

China

Thailand

Korea

(bp)

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09Japan Euro UK KoreaJan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09US Japan China Korea



2. Risks and Challenges Raised during the Crisis



Risks and Challenges

Risk Factors Effects

#2 Global economic recession Decrease in exports & slowdownRapid economic recession

#1Lack of FX liquidity

High current external debt to FX reserves ratio

Reduction of FX reserves Increased pressure on FX liquidityfor Korean banks with large amount of short-term external debts

#3

#4Possible deterioration of banks’ soundness

Fall in incomes & real estate prices Possible deterioration of householdsEconomic recession, credit crunch Possible deterioration of corporate sector

Non-performing household and corporate loans, loss of principalinvestment Deterioration of capital soundnessHigh loan-to-deposit ratio, short term funding Fundingmismatch Liquidity problem

Possible deterioration of private sector

7



3. Policy Responses



Initial Responseafter the Lehman shock

Medium-term Responses: Key Framework

Policy Framework

• Payment guarantee of

● Policy rate cut: 5.25% → 2.0%

● Won liquidity provision: 23.3 tn won● Total Stimulus package: 7.4% of GDP (4.3% in 2009)FX Market Stabilization

Fiscal Stimulus Package

● Extension of SME loans and guarantees due 2009● Creation of Bond Market Stabilization Fund (10 tn won)

Corporate Sector Liquidity Provision

#1#2

#3

9

DeepeningEconomicRecession

borrowings by domesticbanks: $100 bn

• Currency swap lines withU.S., Japan, and China:$30 bn each /$90 bn in total

• $55 bn foreign liquidityprovision by the BOK andthe government

● Launching of Bank Recapitalization Fund: 20 tn won● Purchase of banks’ bad assets through Restructuring Fund by

KAMCO (40 tn won)● Financial Stabilization Fund

Enhancing Banks’ Soundness

● Creditor financial institution-led restructuring● Market-based restructuring

Corporate Restructuring

● Financial support through Miso Credit Foundation● Credit recovery support for low-income households through

debt restructuring and refinancing at lower rates

Social Safety Net

#5

#6



FX Market Stabilization1

Foreign Liquidity Provision : $55 bn

Government & BOKGovernment & BOK

Trade Finance:$21 bn

Market liquidityprovision: $34 bn

Set up $30 bn currency swap line with the U.S.(Oct. 2008) and expanded existing currency swaplines with Japan an China to $30 bn each (Dec.2008)

Decisive role in resolving concerns over Koreanfinancial institutions’ FX liquidity conditions

Currency Swap Lines : $90 bn

1010

Payment Guarantee

an s

Foreign

Bank

Foreign

Bank

Domestic

Bank

Domestic

Bank

Payment guarantee of foreign currencyborrowings: $100 bn

Government

$30 bn

Korea

Japan China

US

$30 bn $30 bn



Tax Cuts

KRW 33.4 tn

Expansionary Spending

KRW 33.7 tn

Total (% of GDP)

KRW 67.1 tn (7.4%)Total

2009 KRW 9.8 tn KRW 29.1 tn KRW 38.9 tn (4.3%)

Tax Cuts and Expansionary Spending to Boost Domestic Economy

Fiscal Stimulus Package2

Sound Fiscal Position

11

Debt Level Lower Than G-20 Peers(2009 e)

Government surplus (% of GDP)

1.1

3.1

1.00.6 0.4 0.4

3.5

1.2

-2.1-3

-2

-1

0

1

2

3

4

2001 2002 2003 2004 2005 2006 2007 2008 2009

35.6

87

217.2

62.774.9

0

50

100

150

200

250

Korea US Japan UK France

(%)

G-20 Average: 75.7%



Corporate Sector Liquidity Provision3

Policy Banks & National Guarantors(trn, won)

54

KDB 27

IBK 27

KDB 32

IBK 36

46.3

Kodit 28.7

Kibo 12.2

68

64.3

Kodit 36.3

Kibo 16.3

Etc 5.4 Etc 11.7

Maturity extension of guarantees provided by

public guarantors till end-2009Maturity extension for SME loans falling due within2009

Review standards and limits eased for new loanguarantees and required process expedited

Extension of SME loans and guarantees

Creation of Bond Market Stabilization Fund (10trn. won)

Fund (10 trillion won)

KDB BanksInsurance

CompaniesSecurities

Companies2 tn 6 tn 0.5 tn1.5 tn

Corporatebond

SMEP-CBO PF-ABCP

ABS issued by

credit-specializedfinancial institutions

12

2008 2009

Etc 5.4 Etc 11.7

Guarantees maturingwithin 2009

Guarantees maturingwithin 2009

Loans maturingwithin 2009

Loans maturingwithin 2009

Extension of maturity for SME loans

andguarantees

Kodit, Kibo

Banks



Enhancing Banks’ Soundness4

Asset Soundness Improvement Recapitalization

-Purchase

of non-performingPF loans of banks andsavingsbanks

- Purchase of NPLs- Purchase of assetsof companies under restructuring- 40 tn won-Operation till 2014

- Bank-specific credit

limit, withdrawal whennecessary- No governmentintervention in banks’shareholders’ rightand management right

Banks’

self-recapitali-zation(18 tnwon)

- MOUs to boostSMEs and realsector support- Fund size to bedecided

KAMCO CorporateRestructuring Fund

20 tn won BankRecapitalization Fund

Financial StabilizationFund

13

BanksNon-banks NormalNon-banks

Recapitalization Recapitalization

(Potential) Insolvency

Purchase of troubled assets

-Support through capital injection or contribution in kind- Selling assets or merger with others

Purchase of troubled assets

KDIC



Bank Recapitalization Fund4-1

Structure of Bank Recapitalization Fund

Institutional & Public

Investors

Institutional & Public

InvestorsBank of KoreaBank of Korea

Korea DevelopmentBank

Korea DevelopmentBank

Purchase ABS(8 tn won)

(10 tn won loan)To improve capitaladequacy without directinjection of governmentfunds

Objective

Recapitalization Fund (20 tn won)

(2 tn won loan)

Banks’ SubordinatedBonds (10 tn won)

Banks’ SubordinatedBonds (10 tn won)

Banks’ Hybrid Bonds & PreferredStocks (10 tn won)

Banks’ Hybrid Bonds & PreferredStocks (10 tn won)

Purchase subordinatedbonds (10 tn won)

Purchase hybrid bonds (8 tn won) &preferred stocks (2 tn won)

To encourage banks to

actively support the realeconomy by increasingtheir loss absorptioncapacity

To induce banks’ activeparticipation in corporate

restructuring efforts (e.g.new funding support toworkout firms)

14



Corporate Restructuring : Framework5

SoundCorp.

A

B

C

D

Normal: Support

Temporary liquidity shortage: Support

Signs of insolvency but viable: Workout

Non-viable: Liquidation

MethodsMethods

Creditor financial institution-ledrestructuring

Creditor financial institution-ledrestructuring

#1

PrinciplesPrinciples

15

A

B

C

D

Signs of Insolvency?

Viable ?

YES

NO

NO

YES

WeakCorp.

Corporate restructuring

support system- Setting up a restructuring fund &

tax incentives

Corporate restructuring

support system- Setting up a restructuring fund &

tax incentives

Market-based restructuring- Encouraging private capital participation

Market-based restructuring- Encouraging private capital participation

#3



5 Corporate Restructuring : Implementation

Industry-basedrestructuring

Restructuring Targets Progress

Prioritize target industries

according to the risk of default

46 out of 277 construction, shipbuilding and

shipping companies have been selected asrestructuring targets

1616

Size-basedrestructuring

Large Business Groups 9 out of 45 main debtor groups have signed

MOU on capital structure improvement

Individual LargeCorporations

Restructuring is underway for selected 33large corporations

SMEs113 SMEs have been chosen as the targetsfor the first round of restructuring, and thesecond round evaluation is underway



Social Safety Net6

Defaults of FinancialObligation

Defaults of FinancialObligation

High Interest RatePayers

High Interest RatePayers

Expansion of Credit Restoration Fund ProgramsFinancial Support through Miso Credit Foundation

Miso CreditFoundation

(formerly, Micro-creditFoundation)

Miso CreditFoundation

(formerly, Micro-creditFoundation)

Contributionfrom dormant

accounts

from banksand

insurance

Donationfrom

individualsandbusinesses

200~300 Miso CreditFoundation Branches

(independently incorporated)

200~300 Miso CreditFoundation Branches

(independently incorporated)

17

DebtRestructuringDebtRestructuring Refinancing atlower ratesRefinancing atlower rates

No. of Beneficiaries(10 thousand)

46

72

2008 2009

2.2

7.3

2008 2009

Eligible Loans(trillion won)

Low-rate loan for business startups and

traditional market merchants

Low-rate loan for business startups and

traditional market merchants

Plan to raise and support 2 tn won over 10 years

* More than 13 times the amount raised over the pastdecade (148 bn won, 2000~2009)

Expansion of the national network (No. of MCIs: 30200~300)

Engagement of voluntary workers (e.g. retired financiers, youths)



4. Lessons Learned



Lessons from the Crisis : Past and Present

Excessive debts & lack of transparency in corporate sector

Prevalent moral hazard causedby distorted lending practices of financial institutions & failure to

Main Causes of the1997 Asian Financial Crisis

StigmaEffect

Global investors’ doubt over the Korean

government’s responses based on their pastexperience in 1997

Circumstances in Korea was thought to beworse than the actual situation

Main Causes of the Current Global Crisis

adapt to rapid financialliberalization

Lack of timely response (e.g.,through restructuring) to thespread of risks in theinternational financial market

Inadequate prudentialregulations

Non-Possessionof ReserveCurrency

KRW weakened rapidly as financial institutionsmoved to USD

Korea suffered more than it deserved as acountry without reserve currency

Export-oriented

Economy

It was widely believed that export-orientedKorea would be hurt more as the globaleconomic recession deepens

19



Comparison with Asian Financial Crisis

Causes

Asian Financial Crisis

(late 1997)Current

Internal factors such ascorporate bankruptcy

External factors

Korea’s financial condition has improved vastly over the past ten years and the country is well-prepared to manage the current crisis

20

Foreign Exchange

Banks

Foreign Currency Reserves US$ 8.9bn US$ 239.7bn 1

ST External Debt / FX Reserves 717% 79% 1

Liquid External Debt / FX Reserves 973% 95% 1

Total External Debt / FX Reserves 1,957% 177% 1

Bank NPL Ratio 6.0% 1.48% 2

BIS Ratio 7.0% 13.74% 2

1 as of September 20082 as of September 20093 as of June of 2009

CorporatesCorporate Debt Ratio 424.6% 108.8% 3

Corporate Interest Coverage Ratio 115.0% 361.7% 3



Self-Evaluation

Household and corporate loan delinquency rates managed at stable 1 percent-level Littlepossibility of massive banking sector defaultsThis is largely attributable to aggressive monetary and financial policies, including tight LTV/DTIregulations.

Immediately after identifying signs of a crisis, the Korean government promptly preparedcountermeasures in coordination among relevant ministries.With frank assessment of certain weaknesses, the government provided accurate and detailedinformation to investors to address misunderstandings and restore market confidence.

Prompt and Honest Response

Management of Financial Sector Soundness

Since the 1997 financial crisis, Korean companies have continued to increase capital and lower debts.The government has maintained a sound fiscal position to be able to provide large-scale stimuluspackage in time.

Need to improve macro-prudential supervisory system to prevent herd behavior among marketparticipants.

With an institutional framework (e.g., KAMCO and Korea Deposit Insurance Corporation) and a legalframework (e.g., Consolidated Insolvency Act and Corporate Restructuring Promotion Act)established since the 1997 financial crisis to deal with restructuring and resolution of NPLs, Korearesponded to the crisis in a timely manner.

Sound Real Sector/Fiscal Fundamentals

Macro-Prudential Supervisory System

Past Restructuring Experience

21



This material has been produced by the Financial Services Commission of Korea(the “FSC”) for

information purposes only and does not constitute an offer to sell or a solicitation to buy any

security or other financial instrument. The information contained in this document has not been

independently verified and neither approval nor guarantee is given that it is accurate or complete.The opinions, forecasts, assumption, estimates and derived valuations contained in this material

should be considered in the context of the circumstances prevailing at the time indicated and are

subject to change at any time without prior notice. Neither the FSC nor other persons shall be

liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages,including lost profits arising in any way from the information contained in this material. This

material is for the use of intended recipients only and the contents may not be reproduced,

redistributed, or copied in whole or in part for any purpose without FSC’s prior express consent.



International Cooperation TeamFinancial Policy BureauFinancial Services CommissionTel 82-2-2156-9661~4

- - -

[email protected]://www.fsc.go.kr

(Dec.2009)Korean Economy

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