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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
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 and Answers
V. Restructuring for a Big Take-Off Beyond the Crisis
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
II. Measures Taken Against the Global Financial and Economic Crisis
II. Measures Taken Against the Global Financial and Economic Crisis
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
II. Measures Taken Against the Global Financial and Economic Crisis
II. Measures Taken Against the Global Financial and Economic Crisis
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
II. Measures Taken Against the Global Financial and Economic Crisis
II. Measures Taken Against the Global Financial and Economic Crisis
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
II. Measures Taken Against the Global Financial and Economic Crisis
II. Measures Taken Against the Global Financial and Economic Crisis
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
II. Measures Taken Against the Global Financial and Economic Crisis
II. Measures Taken Against the Global Financial and Economic Crisis
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
II. Measures Taken Against the Global Financial and Economic Crisis
II. Measures Taken Against the Global Financial and Economic Crisis
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
II. Measures Taken Against the Global Financial and Economic Crisis
II. Measures Taken Against the Global Financial and Economic Crisis
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
II. Measures Taken Against the Global Financial and Economic Crisis
II. Measures Taken Against the Global Financial and Economic Crisis
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
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 and Answers
V. Restructuring for a Big Take-Off Beyond the Crisis
III. Strong Pillars Supporting the Economy
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
I. Economic Policy Direction in 2009
II. Measures Taken Against Global Financial and Economic Crisis
III. Strong Pillars Supporting the Economy
IV. Current Issues and Answers
V. Restructuring for a Big Take-Off Beyond the Crisis
IV. Current Issues and Answers
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
IV. Current Issues and AnswersIV. Current Issues and Answers
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
IV. Current Issues and AnswersIV. Current Issues and Answers
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
IV. Current Issues and AnswersIV. Current Issues and Answers
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%
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 and Answers
V. Restructuring for a Big Take-Off Beyond the Crisis
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!