Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond

Korea’s Economic Policy in 2009:

- Coping with the global crisis and beyond

Korea’s Economic Policy in 2009:

- Coping with the global crisis and beyond

January, 2009January, 2009

I. Economic Policy Direction in 2009

II. Measures Taken Against the Global Financial and Economic Crisis

III. Strong Pillars Supporting the Economy

IV. Current Issues & Answers

V. Restructuring for a Big Take-Off Beyond the Crisis

3

Year 2009 Economic Outlook

1Q 2Q 3Q 4Q

GDP Growth

Employment

Domestic Consumption

Investment

4

Economic Policy Direction in 2009 Amid an unprecedented crisis, the world has been facing Amid an unprecedented crisis, the world has been facing

‘Survival Game’ ‘Survival Game’

and ‘Historic Power Shift’and ‘Historic Power Shift’

First StageFirst Stage Third StageThird StageSecondSecond Stage Stage

““Survival”Survival” ““Take-off”Take-off”““Turnaround”Turnaround”

Overcoming the Overcoming the CrisisCrisis New GrowthNew GrowthPreparing For the Preparing For the

FutureFuture

•Liquidity ProvisionLiquidity Provision

•Timely Fiscal Timely Fiscal

ExpansionExpansion

•Job CreationJob Creation

•Social Safety NetsSocial Safety Nets

•R&D InvestmentR&D Investment

•New Growth EngineNew Growth Engine

•Eco-Friendly Eco-Friendly

industriesindustries

•GlobalizationGlobalization

•RestructuringRestructuring

•Human ResourcesHuman Resources

•Green New DealGreen New Deal

•Public Sector Public Sector

SlimingSliming

External Environment




IV. Current Issues and Answers


II. Measures Taken Against the Global Financial &

Economic Crisis

1. Fiscal Stimulus Package

2. Securing FX Liquidity

3. Financial Market Stabilization

4. Job Creation / Sharing / Training

5. SME’s Liquidity Support

6. Construction Sector Support

7



1. Fiscal Stimulus Package

Tax cut and fiscal expansion will boost domestic economy

Fiscal Stimulus PackagesFiscal Stimulus Packages

ActionAmount

(GDP ratio, %)

Korea

ㆍTax cut of KRW35.3trnㆍFiscal expansion of

KRW16trn

KRW51.3trn (5.8)

USㆍTax cut of USD317bnㆍObama’s SOC spending

plan

USD 0.5~1 trn(3.5~7)

Japan

ㆍThe first stage in AugㆍThe second stage in OctㆍThe third stage in Dec

JPY17trn (3.3)

China

ㆍVAT refund rate increaseㆍSOC investment

RMB4trn (16)

Tax Cut

KRW35.3trn

Public Spending

KRW16.0trn

Total

KRW51.3trn

173.0

32.6

73.264.8

72.558.7

0

50

100

150

200

Korea J apan US Germany France UK

Government Debt Level Lower than OECD Government Debt Level Lower than OECD PeersPeers

2008(E) General Government Gross Financial Liabilities to GDP(%)

Source: OECD Economic Outlook, Nov 2008

OECD average : 79.7%

8



2. Securing FX Liquidity

Provide sufficient FX liquidity and keep FX reserve at a sound level

6th Largest Reserves Globally 6th Largest Reserves Globally Adequate Amount of Foreign ReservesAdequate Amount of Foreign Reserves

FX Reserve Ranking ($bn)

Liquidity ProvisionDirect FX Liquidity Provision : USD55bn

Government GuaranteeBorrowings of banks up to USD100bn

FX Swap LineTotal USD90bn with US, China and Japan

Foreign Exchange Stabilization FundIncreased to KRW20.6trn from KRW10trn

165.9

194.7

200.5

247.7

280.7

455.7

1002.9

HK

Brasil

Korea

India

Taiwan

Russia

J apan

China 1905.6

Increased to USD201.2bnIncreased to USD201.2bnas of Dec 08as of Dec 08

Source: IMF, as of Nov 08 (Sep for China)

Korea’s FX Reserves Trend ($bn)

0

50

100

150

200

250

300

1999 2001 2003 2005 2007 2Q08 Oct/ 08 Dec/ 08

201.2

Diverse FX Liquidity Provision Measures Will Stabilize FX MarketDiverse FX Liquidity Provision Measures Will Stabilize FX Market

9



2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

J an/ 07 May/ 07 Sep/ 07 J an/ 08 May/ 08 Sep/ 08 J an/ 09

3. Financial Market Stabilization I

Liquidity provision to stabilize domestic capital markets

Interest Rate CutsInterest Rate Cuts

Korea Policy Rate Trend (%)Action Amount

ㆍOpen Market Operation KRW15.2trn

ㆍIncrease BOK’s Ceiling on Loans to Bank

KRW2.5trn

ㆍInterest Payment on Reserve Requirement, etc.

KRW1.8trn

Total KRW19.5trn

Δ2.75%sinceOct 2008

5.25%

2.50%

Liquidity Provision Into Money MarketLiquidity Provision Into Money Market

10



3. Financial Market Stabilization II

Stabilization fund will provide liquidity to financial markets

Debt MarketDebt Market Stock MarketStock Market

Investors

KDB Banks Insurers Securities

Bond MarketBond MarketStabilization FundStabilization Fund

KRW10trnKRW10trn

Corporate Bond

SME P-CBO

PF-ABCP

Credit Card Companies’ Debenture

Target Market

KRW2trn KRW6trn KRW1.5trn KRW0.5trn

Supporting Capital MarketsBond Market Stabilization Fund

• Market stabilization by operating Stock

Market Stabilization Fund (KRW0.5trn)

• Providing tax incentives for long-term

holdings of funds to strengthen stability of

the stock market and asset management

companies

11



3. Financial Market Stabilization IIIStimulating self-financing and Bank Recapitalization Fund will increase banks’ loan

capacity

Bank Recapitalization FundBank Recapitalization Fund

BOKInstitutional

InvestorsKDB

KRW10trn KRW8trn KRW2trn

Bank Recapitalization FundKRW20trn

Banks

The Fund is expected to improve BIS ratio by 2.6%

Commercial BanksCommercial Banks

Banks’ Balance Sheet

Risk Weighted Assets :KRW771trn

Liabilities

MortgageKRW7trn

NPLKRW3trn

Equity : KRW82trn

Securitizingby KHFC

Purchasingby KAMCO

Improving Banks’ Soundness to Increase Loan Capacity Improving Banks’ Soundness to Increase Loan Capacity

Capital Injection by Bank RecapitalizationFund (KRW20trn)

12



4. Job Creation / Sharing / TrainingSOC investment, internship and support for job creating companies will create new

jobs

Green Growth for Green JobGreen Growth for Green JobJob Opportunities for Young PeopleJob Opportunities for Young People

Green New Deal

: Eco-friendly SOC investment spending KRW50trn and creating 960,000 jobs over next 4 yearsJob Creation Economic Growth Engine

Infrastructure

Technology

Life Environment

• 4 biggest rivers redevelopment• Eco-friendly transit system• SOC for forming economic zone

• Alternative water resources• Low-carbon, high efficient

technologies• IT ㆍ SW investment

• Biomass• Eco-friendly buildings

Job Creation in the Social Service SectorJob Creation in the Social Service Sector

126,000 Social Service Jobs to be Offered in

2009 Budget (KRWbn)

Number of Jobs

Ministry of Strategy and Finance

72 11,240

Ministry of Labor 190 15,673

Ministry for Health, Welfare and Family Affairs

488 60,457

Korea Forest Service 372 26,240

Others 114 12,317

Total 1,236 125,927

Encouraging Corporation to Create More Encouraging Corporation to Create More JobsJobs

Direct Liquidity Provision

• Providing KRW10trn through KDB to companies creating mass jobs

Internshipfor

Young People

• 23,000 in public sector• 25,000 in SMEs

Global Leadership

Program

• 13,000 for future growth engine• 19,000 for global leadership

13



5. SMEs Liquidity SupportExpanding additional liquidity support of KRW50trn will ease credit squeeze for

SME’s

SMEs Liquidity SupportSMEs Liquidity SupportFast-Track Solutions for SMEs Fast-Track Solutions for SMEs

Sound

SME’s

A

B

C

D

PossibleBankruptcy?

Recoverable?

A

B

C

D

Sound : SME Support

YES

NO

NO

YES

Potentially Risky : SME Support

Risky but Recoverable : Workout

Irrecoverable : Liquidation

Shorten the assessment process from 3 months to 15 days for timely liquidity provision

State-Owned BanksState-Owned Banks

Increasing Loan Capacity by Capital Injection

Credit Guarantee FundCredit Guarantee Fund

27 32

27

36

2008 2009

KDB

IBK

KRW54trn

KRW68trn

Expanding Credit Guarantee Support

+14trn

9.5

19.54

5.7

2008 2009

KODIT

KIBOKRW13.5trn

KRW25.2trn

+12trn

+ Bank Recapitalization Fund (KRW20trn)

14



6. Construction Sector SupportLiquidity provision for constructors and various support measures will stabilize

construction sector

Liquidity Provision for ConstructorsLiquidity Provision for Constructors Boost Real Estate MarketBoost Real Estate Market

Deregulation

Stimulating real estate market by deregulation regarding reconstruction and real estate transaction

Buy Unsold Houses

Unsold houses are being purchased by Government and private sector

Lower Mortgage Interest Rate

Encouraging mortgage interest rate’s decrease by capital injection to KHFC

Con

stru

cto

rs

A

B

C

D

Supportedby

Creditor Banks

Debt Reschedulin

g by Creditor Banks

Workout

Liquidation

Fast Track

All

Small/Medium

Financial Support & Restructuring Led by Creditors

Sound

Potentially Risky

Risky but Recoverable

Irrecoverable


1. Sustainable Surplus of the Current Account

2. Consecutive Fiscal Surplus

3. Financial Strength of the Corporate Sector

4. World-class Industrial Competitiveness

17

III. Strong Pillars Supporting the EconomyIII. Strong Pillars Supporting the Economy1. Sustainable Surplus of the Current Account

The current account balance is to show surplus in 2009 despite sluggish exports

Current Account Balance

Oil Price Decrease

Source: Bank of Korea

Source: Bloomberg

Current Account Surplus Expected in Current Account Surplus Expected in 20092009External ConditionsExternal Conditions

-6-4-20246

J an/ 08 Mar/ 08 May/ 08 J ul/ 08 Sep/ 08 Nov/ 08

USD bil.

0

30

60

90

120

150

J an/ 06 J un/ 06 Nov/ 06 Apr/ 07 Sep/ 07 Feb/ 08 J ul/ 08 Dec/ 08

USD

4.8

2.1

Current Account Balance Amount

A 2008(E) (USD5.0bn)

BExtra Cost from Oil Price Increase1) USD17.9bn

A-B

2008(E) Adjusted USD12.9bn

2009(E) 2) USD10.0bn

2008 Oil Import USD85.8bn

- 2007 Oil Import (USD60.3bn)

Total Increase USD25.5bn

x 70% (Domestic Use)

Net Increase USD17.9bn

1) Increase of Oil Import

2) Assumed Average Oil Price of USD60/ barrel

18

III. Strong Pillars Supporting the EconomyIII. Strong Pillars Supporting the Economy

2. Consecutive Fiscal SurplusKorea’s prudent fiscal position enables it to pursue additional fiscal stimulus, if

necessary

Continuing Fiscal SurplusContinuing Fiscal Surplus

1.3%

0.6%

3.8%

0.4%0.4%

0.7%

1.0%

0%

1%

2%

3%

4%

2003 2004 2005 2006 2007 2008E 2009E

Consolidated Government Balance (% of GDP)

Surplus Well Above Among Its Credit Surplus Well Above Among Its Credit Ratings PeersRatings Peers

Government Surplus (% of GDP)

Source: Ministry of Strategy and Finance Source: S&P Sovereign Risk Indicator, Jul 2008, 2008 forecast data

-0.4

-1.3

-0.5 -0.3

-2.5

-0.7

-2.9

-0.4

-2.0

2.1

(4)

(2)

0

2

4

Kore

a (A)

AA m

edian

A med

ian

HK (A

A+)

Slove

nia (

AA)

Portu

gal (

AA-)

Taiw

an (A

A-)

Italy

(A+)

China (

A+)

Icelan

d (A

)

19

III. Strong Pillars Supporting the EconomyIII. Strong Pillars Supporting the Economy3. Financial Strength of the Corporate Sector

Corporate sector is financially strong and sound

Dramatically Decreasing Debt/Equity Dramatically Decreasing Debt/Equity RatioRatio

Debt to Equity Ratio Trend

Consistently High Operating Income to Consistently High Operating Income to SalesSales

Operating Income/Sales

145%

114% 111%

196%

221%

131%

105% 107% 104%

80%

120%

160%

200%

240%

2000 2001 2002 2003 2004 2005 2006 2007 3Q08

6.7%7.6%

6.1%5.5%

7.4%6.9%

5.3%5.9% 5.9%

4%

6%

8%

10%

2000 2001 2002 2003 2004 2005 2006 2007 3Q08Source: Band of Korea, 1 For manufacturing companies

Increasing Quick AssetIncreasing Quick Asset

Quick Assets of Listed Companies

50.5 53.3

61.8

71.0

40

50

60

70

80

2005 2006 2007 3Q08

KRW tril.

20

III. Strong Pillars Supporting the EconomyIII. Strong Pillars Supporting the Economy4. World-class Industrial Competitiveness

Technological & Technological & Industrial Industrial

PowerhousePowerhouse

Robust industrial base and world- renowned manufacturing companies

Semi-conductor (DRAM, NAND Flash Memory) production : Semi-conductor (DRAM, NAND Flash Memory) production : World’s No. 1World’s No. 1

PDP production : World’s No.1PDP production : World’s No.1Shipbuilding orders : World’s No. 1Shipbuilding orders : World’s No. 1Mobile phone production : World’s No. 2Mobile phone production : World’s No. 2Automobile production : World’s No.5Automobile production : World’s No.5

Cutting Edge IT IndustryCutting Edge IT Industry

World’s 1st CDMA based DMB service provider (May ’05)World’s 1st CDMA based DMB service provider (May ’05)World’s 1st in high-speed internet penetration for 4 consecutive World’s 1st in high-speed internet penetration for 4 consecutive years(’02~’05)years(’02~’05)World’s 3rd in number of internet users (IMD World Competitiveness Yearbook World’s 3rd in number of internet users (IMD World Competitiveness Yearbook 2005)2005)World’s 3rd IT competitive country (Economist Intelligence Unit 2007)World’s 3rd IT competitive country (Economist Intelligence Unit 2007)

Global Innovation Global Innovation IndexIndex

Ranking

Country ’07~’08 ’08~’09

Korea 19 6 ↑13

Japan 4 9 ↓ 5

China 29 37 ↓ 8

Source: INSEAD, Jan. 6, 2009


II. Measures Taken Against Global Financial and Economic Crisis





1. Household Debt Risk

2. Korean Banks’ FX Position

3. Soundness of Korean Banks’ Loan

4. Better Positioned in Shipbuilding Industry

23

IV. Current Issues and AnswersIV. Current Issues and Answers

81.3

100.7 101.0

65.1

0

30

60

90

120

Korea US UK* J apan

1. Household Debt RiskHousehold debt is low-risk and new measures will help improve households’

financial status

Relatively low Financial Debt/GDP RatioRelatively low Financial Debt/GDP Ratio Delinquency Ratio of Mortgage LoansDelinquency Ratio of Mortgage Loans

Mortgage Loans in Korea are Safe Due to Low Mortgage Loans in Korea are Safe Due to Low LTV LevelLTV Level

* UK as of Dec 2007, others as of Jun 2008

Financial Debt/GDP Ratio (%) Delinquency ratio (%)

Household Financial Assets is 2 times larger Household Financial Assets is 2 times larger than Debtthan Debt

1.1

0.7 0.6 0.6 0.7

1.1

0.6 0.4 0.4 0.5

0

1

2

3

2005 2006 2007 Sep/ 08 Oct/ 08Household Loans Mortgage Loans

Korea US HKGerman

yJapan

Mortgage/ GDP

33.4% 72.3% 37.3% 52.4% 36.2%

Regulation System

DirectIndirec

tDirect Mixed

Indirect

LTV Limit40~60

%None 60~70% 60%

Indirect

601.4 671.1 739.7 780.7 769.7

1714.11736.31707.11521.8

1400.9

300

600

900

1200

1500

1800

2100

2005 2006 2007 J un 08 Sep 08Financial Assets Financial Liabilities

* Korea LTV ratio 47% on Sep 2008

24


2. Korean Banks’ FX Position

Korean banks have no currency mismatch problem

Operation

Amount

(USDBil)

FinancingAmou

nt

Forward exchange purchased

65.7 External debt 127.4

Loans 45.5Residential deposits in foreign currency

19.3

Trade bill discount operation

50.5Swap with foreign bank branches

23.0

Others

(Securities, deposits, etc.)

40.0Swap with bond investors

(foreigners)

32.0

201.7 201.7

Foreign currency financing/operation - Korean banks Foreign currency financing/operation - Korean banks

Jun 2008 Dec 2008(E)

Operation

Amount

(USDBil)

FinancingAmou

nt

Forward exchange purchased

54.3 External debt 99.9

Loans 47.7Residential deposits in foreign currency

24.8

Trade bill discount operation

39.6Swap with foreign bank branches

15.9

Others

(Securities, deposits, etc.)

8.7Swap with bond investors

(foreigners)11.0

Government’s supply*(Swap, Loan)

37.7

189.3 189.3*Assumed that all the Government’s supply has been provided to domestic banks.(Some might be provided to foreign banks branches.)

25


3. Soundness of Korean Banks’ Loans

Korean banking sector is sound and has sufficient room to withstand risks

Moderating Loan GrowthModerating Loan Growth Low Delinquency RatioLow Delinquency Ratio

Moderate Loan-to-Deposit RatioModerate Loan-to-Deposit Ratio Sufficient Room to Withstand Further Sufficient Room to Withstand Further Default RiskDefault Risk

2.0

1.11.6 1.8

2.9

5.04.24.2

4Q07 1Q08 2Q08 3Q08

SME Loans Household Loans

1.7

0.6 0.7 0.6 0.7 0.7

1.4 1.5 1.51.8 1.9

0.7

J ul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08

SME Loans Household Loans

Loan Growth (%) Delinquency Ratio (%)

Loan-to-Deposit Ratio (%)

119.7

103.5

123.7126.5 128.2 126.8

124.2

101.1

104.2 104.2 105.4 104.6

100.0

110.0

120.0

130.0

2007 J un 08 J ul 08 Aug 08 Sep 08 Nov 08With Deposit With CD and Deposit

* US : 112% (Including CD, as of July 2008)

• Sufficient buffer to absorb the impact of further default risk

① Coverage ratio is approximately 175.1% (Sep.2008)

② NPL → 0.8% (Sep.2008) / LTV 47% (Sep.2008)

• Stringent risk management systems implemented after Asian Financial Crisis

• Well-diversified lending exposure to various sectors

- Manufacturing 35.2%, Real Estate 17.1% Private Sector 14.3%, Construction 9.7%

26


Proportion of Bulk Carrier for Top 7 Proportion of Bulk Carrier for Top 7 ShipbuildersShipbuilders

Tanker, Container, etc.

Bulk

90%

10%

4. Better Positioned in Shipbuilding Industry

Korean shipbuilding companies are well-positioned to withstand the recent deterioration in the global shipbuilding market

Share of Top 7 CompaniesShare of Top 7 Companies Market Share among Domestic Market Share among Domestic ShipbuildersShipbuilders

Increase in Global Market Share in 2008Increase in Global Market Share in 2008

Amount (100mil) Proportion

Market Share (%)

Top 7

Small/ Medium

85%

15%

15%

85%

10%

90%

28

Early Signs of Turnaround

1Sufficient Fiscal Stimulus Package

2Preemptive Liquidity Provision

3Enhancing Soundness of Financial Institutions

4Boosting Domestic Consumption by Job Creation

5Supporting Construction and SME’s Sector

6Facilitating Corporate Restructuring

Korean Government’s MeasuresKorean Government’s Measures Increasing Foreigners’ Net Buying of Increasing Foreigners’ Net Buying of KOSPIKOSPI

Decreasing Korea CDS SpreadDecreasing Korea CDS Spread

-800

-400

0

400

800

Oct/ 08 Nov/ 08 Dec/ 08 J an/ 09

0

200

400

600

800

Oct/ 08 Nov/ 08 Dec/ 08 J an/ 09

5 yr

3 yr

Market reacted favorably to the Korean government’s decisive measures

29

Restructuring for a Big Take-off beyond the Crisis

Korean government learned its lesson from the 1997 crisis:immediate and efficient restructuring should be executed to provide intensive

support to healthy firms and increase competitiveness of Korean economy

Creditor Banks Will Execute Restructuring Plan Through Mediation CommitteeCreditor Banks Will Execute Restructuring Plan Through Mediation Committee

Temporary Liquidity Squeeze

Signs of Insolvency

The Irrecoverable

Financial Support

Restructuring

Liquidation

Mediation Committee for Credit Financial

InstitutionsCorporate

Restructuring Coordination Committee

Financial Services

Commission(coordination,

policy response)

CreditorsFinancial Support & Restructuring Led by Creditors

The Korea Economy is Fully Prepared to Move Further and Higher Than The Korea Economy is Fully Prepared to Move Further and Higher Than

Its PeersIts Peers

Corporate Restructuring

Coordination

Thank You!Thank You!

Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond

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Transcript of Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond