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.