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

1. Financial Crisis
South Korea
Presented By:
Abishek Munshi
Senthil Kumar

2. Agenda
▪ Backstory
▪ What brought the crisis?
▪ Consequences
▪ Recovery
▪ Current Situation
▪ Road Ahead
▪ Will History Repeat itself?
▪ Recommendation

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. What brought the Crisis

5. 3
Major Factors

6. ▪ Inflation
1. Current Account Deficit
▪ Recession in world economy
▪ Appreciation of Korean Won

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. 1990 1995
Competitiveness
Profitability and Flow
On Investment
Triggers

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. 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. 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. 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. South Korea
Economic Investigation – Last 5 years

14. Economic Investigation – Last 5 years
GDP Fluctuations:
Between 4% to 6%
Current GDP :
1.305 trillion USD

15. Investigation - Continues
Inflation, in last 5 years
have fluctuated but
crossed the targeting
range only twice

16. Investigation - Continues
Sizable trade and current
account surplus have
buttressed KOREAN WON,
encouraging financial
Inflows supporting Local
currency

17. Investigation - Continues
Foreign Currency
reserves (September
2014):
355 billion USD

18. Investigation - Continues

19. South Korea
Road Ahead

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. Will History Repeat Itself???
• Still prone to contagion effect.
• Country is dependent on few chaebols and certain industries.

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. 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. 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. Financial Crisis is a stark reminder that transparency
and disclosures are essential in today’s market place
- Jack Reed

26. Thank You