The Korean economy once again proved its durability after undergoing its sharpest contraction in the wake of the financial crisis. The remarkable rebound was the combined result of the rigorous restructuring efforts, the elimination of bad loans from the banking sector through massive and decisive public money injection and more or less favorable macro conditions during 1999-2000. The depreciation of the real exchange rate and expansionary macroeconomic policies also provided a favorable environment for the rapid rebound. The severe liquidity crisis that was triggered by investors' panic and amplified later by the structural vulnerabilities of the corporate and the banking sector and the accompanying policy responses explain the drastic boom and bust cycle observed after the crisis. Later the quick restoration of the banking sector soundness contributed to the normalization of the credit supply to the household sector, which had been suppressed for several decades in order to channel funds to key areas in the industrial sector. Normalization of banking activity helped streamline lending processes and provided an effective cushion against serious terms of trade shock and the worsening worldwide economic conditions in 2001-2002. Fundamental market weakness has not been entirely eliminated, however, prompting a continued positive role of the government to shore up flagging market stability. Korea's V-shaped recovery was possible due to all-out expansionary policy measures and the comprehensive restructuring drive in the corporate and the financial sector.

(Table 1)

Annual Chief Real Interest Rate Change1)

(unit: %, period average)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Call interest rate (value tomorrow) 7.7 8.1 7.3 6.2 8.1 7.5 8.6 7.6 4.2 2.9 0.4 Corporate bond yield (3 year) 9.6 10.0 7.8 6.7 9.3 7.0 8.9 7.6 8.0 7.1 2.6

Note: 1) real interest rate = nominal interest rate - consumer price increase rate Source: Bank of Korea

(Table 2)

Wage Increase Rate and Labor Productivity Increase Rate

(unit: %, year-on-year)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Labor productivity increase rate 12.5 13.8 11.1 8.8 9.4 10.3 12.5 14.9 11.8 15.9 10.7 5.1 Wage increase rate 18.8 17.5 15.2 12.2 12.7 11.2 11.9 7.0 -2.5 12.1 8.0 6.2

Source: National Statistical Office

(Table 3)

Economic Indicator

(unit: as of year-end)

1998 1999 2000 2001 2002 Usable Foreign Exchange Holdings (in hundred million dollar) 485 740 962 1,028 1,214 Exchange Rate to U.S. Dollar 1,204 1,138 1,264.5 1,313.5 1,186.2 Interest Rate Call Rate (day) Corporate Bond (three years) Treasury Bill (three years) 6.48 8.00 6.95 4.74 9.95 9.03 6.01 8.13 6.70 3.98 7.04 5.91 4.49 5.68 5.11 Stock Price Index (p) 562.46 1,028.07 504.62 693.70 627.55 Foreign Debt Total External Liabilities (in hundred million dollar) Gross Foreign Credit (in hundred million dollar) Short Term Foreign Debt 1,487 1,285 20.6 1,371 1,454 28.6 1,317 1,647 36.4 1,188 1,654 34.5 1,310 1,853 38.0 Rate of Dishonored Bills (%) (yearly average) Newly / Defaulted Incorporated corporation (ratio) 0.12 (Dec.) (0.38) 7.1 (Dec.) 0.14 (Dec.) (0.33) 12.8 (Dec.) 0.27 (Dec.) (0.26) 10.1 (Dec.) 0.15 (0.23) 16.0 0.07 (0.06) 15.4 Foreign Investment (in hundred million dollar) 89 155 152 113 91 Industrial Output (compared with the same period, %) ^ 6.5 24.2 16.8 0.7 8.0 Real Economic Growth Rate (compared with the same period, %) ^ 6.7 10.9 9.3 3.1 6.3 Nominal Economic Growth Rate (compared with the same period, %) ^ 2.0 8.6 8.1 5.7 8.1 Unemployment rate (%) Unemployment (ten thousand) 7.0 149 6.3 137 4.1 91 3.8 85 3.1 71 Current Account Balance (in one-hundred million dollars) Customs Export (in one-hundred million dollars) Customs Import (in one-hundred million dollars) 404 1,323 933 245 1,437 1,198 122 1,723 1,605 82 1,504 1,411 61 1,625 1,521 Consumer Price Index (compared with the same period, %) 7.5 0.8 2.3 4.1 2.7

Source: Ministry of Finance and Economy

The most notable changes after the crisis was the all-out attempt to restructure the corporate and the banking sector. Initially, the government developed five tasks to foster the corporate restructuring process: (1) enhance the transparency of corporate governance; (2) abolish cross debt guarantees and unfair transactions among the affiliates of business conglomerates; (3) improve business capital structures; (4) encourage corporations to concentrate their efforts on their core competencies; and (5) strengthen the accountability of major shareholders and top management.

Notably, creditor banks have established fair loss sharing practices by requiring corporations to bear restructuring costs. However, banks themselves underwent extensive revampment and they should be regarded now as vehicles to expedite corporate sector restructuring rather than as dominant players to fix the glaring corporate problems.

Most importantly, however, corporations have been encouraged to establish core businesses and focus on strengthening them by resolving their overcapacity problems and selling non-core assets and affiliates. Consolidated financial statements in compliance with international accounting standards began to be phased in starting from 2000. To build transparent management systems, a dogmatic owner-management system has been checked internally and externally. Rights and responsibilities of outside directors were enhanced while the requirements of cumulative voting were eased. In addition, class action lawsuits are gradually being introduced. Finally, businessmen and accountants who commit financial statement frauds or those who are found responsible for the insolvency of their companies now face criminal penalties. With these and other developments, one can reasonably come to the conclusion that the restructuring efforts made to date by the corporate sector set the tone for the next round of autonomous restructuring efforts by corporations themselves.

Turning to the top 30 business conglomerates, their total average debt to equity ratio has dropped from 519 percent to 206 percent, a result which has been accomplished through applying the proceeds received from asset dispositions, rights offerings, and foreign capital inducement to reduce debt.

In addition, most of the debt cross guarantees among their affiliate companies have been eliminated. As of September 2000, nearly three years after the financial crisis hit the nation, only 800 billion won (US$6.1 billion) of cross guaranteed debt remained from the pre-crisis total of 26.9 trillion won (US$20.7 billion). Moreover, even while suffering under a formidable economic slump, the top four chaebols have recorded significant increases in profits through aggressive restructuring measures, including asset sales that reduced the number of their affiliates by about one third. It is also noteworthy that 14 out of the top 30 chaebols as of the end of 1997 had either undergone corporate workouts or filed for protection under the bankruptcy laws.

For now, the general perception is that Korea's corporate debt size is still quite large and the reduction in debt ratio is largely the result of raising capital. The pessimistic view comes from the greater outstanding balance of corporate bonds. More corporate bonds were issued, as bonds were displacing bank loans while bank restructuring was underway. Daewoo was the main player under the displacement process. But the absolute level of corporate debt has been actually declining since the financial crisis in 1997. As a fortunate consequence of the fast economic growth during 2001-2002, the ratio of corporate debt to GDP substantially declined.