South Korea’s Economy

Agenda

Miracle on Han River

Asian Financial

Crisis

Industrial Policies

Sectorial Analysis

Macro Economic Indicators

Fiscal Policy

Monetary Policy

Expenditures and

Revenues

Banking and

Financial Structures

Currency Foreign Policy

Miracle on the Han River

Reasons

Export fuelled economic growth

Industrialization, education boom, rise in living standards

Urbanization, modernization, 1988 Seoul Olympics

Transformed from ashes of Korean war to a trillion dollar economy

Revenue Growth

Some Figures

US$30.3 billion

US$340.7 billion

8.7% per year

Real GDP 1960 1989

US$1226 US$80291960 1989

GDP per capita

Growth

Outward looking strategy in 1960

Counter - poor natural resource endowment, high savings rate, tiny domestic rate

Inflow of foreign capital was encouraged

Conservative monetary policy and tight fiscal policy in 1980’s

Financial Stability

Government Intervention reduced

Liberalization of imports and foreign investment policies

High investment in public projects

Double digit inflation bought under control

First surplus in 1986, US$7.7 billion in 1987 and US$11.4 billion in 1988

GDP

GDP (purchasing

power parity):

$1.335 trillion

(2008 est.)$1.306 trillion

(2007 est.) $1.243 trillion

(2006 est.)

GDP - real growth rate:

2.2% (2008 est.)

5.1% (2007 est.)

5.2% (2006 est.)

GDP (official exchange rate): $947 billion (2008

est.)

Rank: 15

Labor Force

Labour force• 24.35 million (2008 est.) [Total Population of 50.06

million]

Labor Force Ranking

Other Details

Poverty Line

• Total population below poverty line: 15%

Household income or consumption by percentage share:• Lowest 10%: 2.7%• Highest 10%: 24.2%

High tech industries

Samsung Group• Worlds largest conglomerate• High Tech Electronics

Hyundai-Kia• South-Korea: In top 5 Automakers

Display-Electronics• Worlds largest maker of LCD, Plasma, LED, CRT

Shipbuilding• Worlds largest Shipbuilding industry• Hyundai and Samsung Heavy Industries

Asian Financial Crisis

Asian Financial Crisis•a shortage of foreign

exchange in Asian countries

•inadequately developed financial sectors in the troubled Asian economies

•effects of the crisis on both the United States and the world

•the role, operations, and replenishment of funds of the International Monetary Fund.

It involves

four basic

problems or

issues:

Impact on South Korea

In return for IMF emergency loans, Korea agreed to several conditions and reforms:

Control inflation

Reducing current deficit

Increasing internatio

nal reserves

upgrading accountin

g and disclosure standards

Industrial Policies of South Korea

1960-2000

•Emphasis on exporting products from Light Industries e.g. textiles

•Export promotion measures e.g. tax deductions and export finance schemes

1960’s

•Focus shifted from LI to the build-up of high value-added HCI sector

•Preferential policy loans, selective protection, entry regulations, and corporate tax deductions

1970’s

•Direction of industrial policy changed toward R&D in economic development

•Export-led growth strategy was continued in sectors Semi-conductors, automotives, shipbuilding, metal, and small-sized aircrafts

1980’s

•Promotion of IT and biotechnology and development of SMEs

•Enactment of the Special Law on Innovation of Science and Technology in 1997

1990’s

R&D Expenditure in Billion won

1980 1990 2000 20030

1000

2000

3000

4000

5000

6000

R&D Expenditure in Billion won

2000’s

• Increase was from US$4.0 billion in 1989 to US$26.5 billion in 2004 -10.4 percent of total exports

Exports of semi-conductors increased

Supporting international marketing activities and exhibitions abroad

Tax benefits to R&D activities and FDI inflows

Recent policy to develop Eco-friendly industriesby investing $84.4 bn for next five years

Sector-wise analysis

Energy sector

Energy used in power generation consists primarily of oil, coal, nuclear & LNG

Limited domestic energy resources

Oil supplies 50 % of South Korea’s total energy consumption

South Korea is the 5th largest net importer of oil in the world

Hydropower & other renewable energy sources make up a small fraction

Agriculture sector

Heavily dependent on imported agricultural commodities

Agriculture's share of GDP has steadily declined to about 3% in the past two decades

Total imports of agricultural, fishery and forest products in 2008 totaled $22 billion

Korea is the 5th largest market for U.S. agricultural products

In 2008, agriculture trade deficit was $17 billion

Tourism sector

1988 : a boom year for tourism industry

Continuation of trend in subsequent years & the 2002 FIFA World Cup

Incheon International Airport, rated the best airport worldwide consecutively since 2005

In 2007, South Korea had 6.4 million visitors making it the 36th most visited country in the world

Industrial sector

Hyundai Kia Automotive Group is the world's fourth largest automaker, after Toyota, GM and Volkswagen

After recession country’s auto sales posted a combined 2.7% Y-O-Y increase in 2009

World's leading producer of computer memory chips & electronic products

World's largest shipbuilder

Macro Economic Indicators

GDP and Growth Rate

Definition• The sum of the value of new, final goods produced within the

domestic borders of an economy.

Expanded 6% over the past 4 years.

Worth 929 billion dollars or 1.50% of the world economy.

Two main reasons for increased GDP growth are:• Competitive education system.• Highly skilled and motivated workforce.

Shift from centrally planned economy to a more market oriented one.

Major concerns• Rapidly ageing population.• Structural inefficiencies.

GDP and Growth Rate (contd…..)

Inflation Rate

Definition: • A general increase in

prices measured against a standard level of purchasing power.

Well known measures:• Consumer Price Index

(CPI)• GDP Deflator

January 2010 figure• 3.7 Percent.

Recent trend:• Agriculture, livestock and

fishery products have gained strength in recent years.

• Domestic oil prices have come down and prices of non ferrous metals has continued to increase.

Inflation Rate (Contd…..)

Unemployment Rate

Labour force v/s non labour force:• Labour force: The number of people employed plus the

number unemployed but seeking work. • Non labour force: Those who are not looking for work,

those who are institutionalised and those serving in the military.Recent trends:

• Hiring in the agriculture, forestry & fishery dropped significantly in November 2009.

• Sluggish exports led to decreased unemployment in manufacturing sector.

• Hiring in private sector remained weak due to downward trend in construction sector.

• Employment in services sector soared due to Government’s job creation policies.

Unemployment Rate (Contd….)

Fiscal Policy

Pre 1997 era

The average growth rate in Korea had been well above 7% before 1997

The government had a very low external debt

But the privately owned debt for the country was quiet significant

It worked on “high-debt, high growth model”

External Debt

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

50

100

150

200

250

300

350

400

450

External Debt in $Bn

Present policies

The fiscal policy for 2010 is at 2.9% of the GDP

In order to fight recession the Korean government has decided to Frontload 70% Of 2010 Budget In First Half

Presently defense and social welfare constitute the highest chunk of budget

Monetary Policy

Key Points

Stock prices and exchange rates exhibited very unstable movements. Expanded the supply of Korean won. Banks’ deposit and lending rates

remained lowSouth Korea producer price inflation hit

a 10-month high.Pace of growth was not as expected

and shows a very slow pace. Increase in Open market Operations.

Interest Rates

Critical Questions

Two Critical Questions Still Remains• When will South Korea tighten up its monetary policy?

• How Current Monetary policy will tackle with ever rising Inflation?

Expenditure and Revenue

Expenditure

Government Spend is relatively very less compared to rest of the countries.

Mainly the expenditure is into Infrastructure, R&D, national defence, and education.

Mainly defence which accounts for 24% of expenditure

Now recently it was observed that focus is shifting from defence to health care.

Revenue

Tax, mainly indirect taxes

Disinvestment in Electrification, banking, communication and Manufacturing, but still remain major stockholder

• Government Enterprise• Government invested Enterprise• Government Subsidiaries• Government Backed Enterprise

Four Public Enterprises

Banking and Financing structure

Central Bank

2 parts of financial system:

• Monetary institutions: Central bank & deposit taking banks

• Other financial institutions

Central bank:

• Established on June 12, 1950

• Purpose: price stability• Issuing banknotes and

coins, formulating and implementing monetary and credit policy, serving as the bankers' bank and the government's bank.

• Governor, the Senior Deputy Governor, and 5 Deputy Governors, manage departments in the head office and 16 domestic branches

Financing History : A timeline

1960s: • Foreign credit based which decreased

towards 1980s• Generated need for domestic savings• Nationalization of banks1980s: • Current account became surplus fuelling

shortage of domestic savings• De-regulation of interest rates• 3 new commercial banks and 13 financial

institutions

History.. continued

Commercial banks focused on short term loans

Newer sources of funding for commercial banks

Relaxation of FOREX controls

Foreign investors: trust funds, convertible bonds, bonds with warrants

Banking sector today

Banks are largely no longer handmaidens to the chaebol

• Kookmin Bank (KB )• Shinhan Financial Group (SHG )• Woori Financial Group (WF )• Hana Bank -- 70% of the market

Big Four

Foreign investments

Retail banks shrunk to 11 in number

Other indicators : energy scenario

Oil: fifth: largest net importer of oil in

the world

Coal : 24 % primary energy

Hydropower and other renewable energy sources :

small fraction

Currency - won

All @Won

The won (원 ) (sign: ₩; code: KRW) is the currency of South Korea

Subunit: 1 Won= 100jeonTheoretical (not used)

Coins₩1, ₩5, ₩10, ₩50, ₩100, ₩500

Banknotes₩1000, ₩5000, ₩10000, ₩50000

First South Korean won

The won was first used between 1902 and 1910

Japanese invasion in 1910 : The won was replaced at par by the yen, made up of the Japanese currency and banknotes of the Korean yen.

Post world war II:

• Division in Korea (North and south)• Won replaced the yen at par• Only bank notes were issued by the Bank of

Joseon (1946)Central bank: Bank of Korea (1950)

Pegs for the first South Korean won

Date introduced Value of U.S. dollar in won

October, 1945 15

July 15, 1947 50

October 1, 1948 450

June 14, 1949 900

May 1, 1950 1800

November 1, 1950 2500

April 1, 1951 6000

Hwan

First South Korean won was replaced by the hwan on February 15, 1953

1 hwan = 100 won

In 1959, coins were introduced in denominations of 10, 50 and 100 hwan

The hwan also suffered from inflation and a series of devaluations occurred

Second South Korean won

The won was reintroduced on June 9, 1962 1, 5, 10, 50, 100 and 500 won notes were introduced by the Bank of Korea

Value was pegged at 125 won = 1 U.S. dollar

It became the sole legal tender on March 22, 1975 with the withdrawal of the last circulating hwan coins.

ISO 4217 code : KRW.

Won was allowed to float on December 24, 1997 after an agreement with IMF

Won was devalued to almost half of its value, as part of the East Asian financial crisis.

On June 23, 2009, the Bank of Korea released the 50,000 Won note

FX Rates

Wednesday, February 03, 2010

  1 KRW in KRW

American Dollar 0.00087184 1147

Australian Dollar 0.000982502 1017.81

British Pound 0.000546271 1830.59

Chinese Yuan 0.00595169 168.019

Euro 0.000623455 1603.96

Hong Kong Dollar 0.00676948 147.722

Indian Rupee 0.0400826 24.9485

Japanese Yen 0.0790105 12.6566

Swiss Franc 0.000918849 1088.32

Malaysian Ringgit 0.00296384 337.4

S. Korean Won to US Dollar Currency Exchange Rate

Past Trend Present Value

S. Korean Won per One U.S. Dollar

South Korea:FOREX and GOLD reserves

FOREX and GOLD reserves rankings

Year Reserves of foreign exchange and gold

Rank Percent Change

2004 $155,400,000,000 4 - 

2005 $199,100,000,000 4 28.12 %

2006 $210,400,000,000 4 5.68 %

2007 $239,000,000,000 5 13.59 %

2008 $262,200,000,000 6 9.71 %

2009 $201,200,000,000 6 -23.26 %

South Korea in News for FOREXSouth korea’s National Pension Service(NPS) announced that official foreign reserves stood at record high as of January end

According to BOK, Forex amounted to $273.69 billion

Increase is attributed to operating profits on forex reserves and redemptions at maturity by NPS of its currency swaps with BOK

Foreign Economic Policy

Exports

Exports

Imports

Imports

International Involvement

APEC – Asia-Pacific Economic Cooperation

• KORUS FTA 2006

Relationship with US

North-South Economic Ties

FTA with EU

Thank You