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