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Financial crisis Of 1997 - South Korea

Case Study - Financial Crisis of 1997 - South Korea
1. Political and Economical History
2. Causes Of Financial Crisis
3. Consequences Of Financial Crisis
4. Recovery Measures
5. Current Situation - Political & Economical
6. Vulnerability of Current Economic situation to another future financial crisis
7. Economic Projections
8. Recommendation to save South Korea from another Hit

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Financial crisis Of 1997 - South Korea

  1. 1. Financial Crisis South Korea Presented By: Abishek Munshi Senthil Kumar
  2. 2. Agenda ▪ Backstory ▪ What brought the crisis? ▪ Consequences ▪ Recovery ▪ Current Situation ▪ Road Ahead ▪ Will History Repeat itself? ▪ Recommendation
  3. 3. Japan Occupied Korea untill 1945 1910 Millitary Government and Inflation Accelerated 1962 Economic Recovery 1953 Independence From Japan 1945 Economic growth in Rapid Pace and New Economic Reform 1973 Return to Democracy 1980 Civilian Government and Economic Reform 1966 Import Financed by UNKRA and UNCACK 1960 1910 1918 1926 1934 1942 1950 1958 1966 1974 1982 1990 Financial Crisis 1997
  4. 4. What brought the Crisis
  5. 5. 3 Major Factors
  6. 6. ▪ Inflation 1. Current Account Deficit ▪ Recession in world economy ▪ Appreciation of Korean Won
  7. 7. 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
  8. 8. 1990 1995 Competitiveness Profitability and Flow On Investment Triggers
  9. 9. 2. Failed to Bailout General Notion : Financial bailout for large conglomerate whose survival has strong consequences on stability of the Economy BUT ▪ 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..
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. South Korea Economic Investigation – Last 5 years
  14. 14. Economic Investigation – Last 5 years GDP Fluctuations: Between 4% to 6% Current GDP : 1.305 trillion USD
  15. 15. Investigation - Continues Inflation, in last 5 years have fluctuated but crossed the targeting range only twice
  16. 16. Investigation - Continues Sizable trade and current account surplus have buttressed KOREAN WON, encouraging financial Inflows supporting Local currency
  17. 17. Investigation - Continues Foreign Currency reserves (September 2014): 355 billion USD
  18. 18. Investigation - Continues
  19. 19. South Korea Road Ahead
  20. 20. Road Ahead 8 7 6 5 4 3 2 1 0 Real GDP growth Industrial production growth Gross fixed investment growth Unemployment rate (av) Consumer price inflation (av) Consumer price inflation (end-period) Short-term interbank rate Government balance (% of GDP) Current-account balance (% of GDP) Forecast 2014 2015 2016 2017 2018 2019
  21. 21. Will History Repeat Itself??? • Still prone to contagion effect. • Country is dependent on few chaebols and certain industries.
  22. 22. 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
  23. 23. 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)
  24. 24. 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%. would aggravate 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
  25. 25. Financial Crisis is a stark reminder that transparency and disclosures are essential in today’s market place - Jack Reed
  26. 26. Thank You

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