Korea’s Policy Initiative : To Overcome the Global Crisis

Korea’s Policy Initiative :To Overcome the Global Crisis November 2008 Ministry of Strategy & Finance Republic of Korea

Macroeconomic Indicators2. Current Issues & Answers3. Government’s Proactive Responses4. Korea : Economic Outlook for 2009

GDP Growth Trend Export growth remains resilient, but domestic consumption is weakening GDP Growth Trend 2

Current Account Balance Current account balance will rebound but could be impacted by global economic slowdown High Trade Dependency High Fluctuation in Oil Prices WTI Trend (US$) Export Import Other nations Adjustments on GDP Growth Rate Forecast Current account balance would turn to surplus in 4Q08 IMF Forecast on 2009 GDP Growth Rate (%) 2008 Current account balance (US$ bn) e e 4.0 -8.4 3

Job Market Situation Unemployment rate keeps on steady pace but the number of new jobs created is declining Unemployment Rate Job Creation Trend Unemployment Rate (%) Number of New Jobs Created (YoY, ‘000) 4

Market Reaction to Global Credit Turmoil Market indicators demonstrates a negative reaction to world-wide spread credit crunch Foreign Exchange Rate (KRW/USD) CDS levels (USD/KRW) (5 Yr Credit Default Swap Premium) Performance of KOSPI (2008 YTD) KOSPI (Closing Price, KRW) 5

Concerns Symptoms of Reemergence of 1997 Financial Crisis 1 Korea’s External Debt Level & Foreign Reserves 2 Korean Banking System 3 Real Estate Bubble Burst 4 3 Construction Sector is in Stagnation 5 3 Possibility of SME Fallouts 6 3 7

Symptoms of Reemergence of 1997 Financial Crisis #1 Current economic indicators are totally different from those of 1997. There is little possibility of reemergence of financial crisis Asian Financial Crisis (late 1997) Current Causes Foreign Exchange Banking Sector Corporate Sector 1 as of October 2008 2 as of June 2008 3 as of end of 2007 8

Korea’s External Debt Stands at a Risky Level? #2-1 A substantial portion of Korea’s external debt is risk-free $151.8bn (36.0% of total) without default risk Most of short-term external debt by foreign bank External debt structure (US$ bn) Total external debt by bank (US$ bn) Loans between subsidiaries 7.1 (2%) Domestic bank No risk Foreign bank branch Short-term external debt by bank Domestic bank Actual amount of foreign debt burden 268.0 (64%) Foreign bank branch Total Outstanding External Debt: US$419.8bn Source: Bank of Korea (as of June 2008) Source: Bank of Korea (as of June 2008) 9

Korea’s Foreign Reserves are Not Liquid? #2-2 Korea has 6th largest foreign reservesworldwideand most of the foreign reserves arehighly liquid. Reduction in October is mainly due to government’s provision of dollar liquidity to banking sector Adequate amount of foreignreserves Highly liquid foreign reserves FX reserves (US$ bn) Total reserves (US$ bn) AA rated or above bondsUS$ 192.5bn (90.7%) AA rated or above bondsUS$ 192.5bn (90.7%) 6th largest reserves globally (October 2008) FX reserves (US$ bn) 1,906 DepositUS$ 19.3bn (9.1%) Others US$ 0.5bn (0.2%) 1 Includes Hong Kong (AA+), Slovenia (AA), Portugal (AA-), Italy (A+), Chile (A+), Czech Republic (A) and Estonia (A). Credit ratings by S&P. Source: IMF. Source: Bank of Korea (as of Oct 2008) 10

Korean Banks Have FX Liquidity Concerns? #3-1 Korean banking sector has no currency/duration mismatch concerns and the quality of asset is sound No Currency Mismatch Sound quality of foreign currency asset NPL ratio of foreign currency loans (%) Foreign currency funding / operation - Korean banks (US$ bn, as of Jun08) 1) Estimates No duration mismatch 3-month foreign currency liquidity rate (%) Guidance: 85% * Liquidity rate: external asset maturing within 3 month / external debt maturing within 3 month 11

Korean Banks Encounter Solvency Issues? #3-2 Korea’s banking sector is sound and has sufficient room to withstand risks Moderating Loan Growth Low Delinquency Ratio Loan Growth (%) Delinquency Ratio (%) Moderate Loan-to-Deposit Ratio Loan-to-Deposit Ratio (%) * US : 112% (Including CD, as of July 2008) 12

Real Estate Bubble Will Burst? #4 Historically, Korea’s real estate prices have lagged GDP growth, especially when compared to other markets. This balanced growth has been supported by prudent mortgage supervision Real Estate Price Growth Mortgage Loan-to-Value Ratio Housing Price Index LTV ratio (%) Housing Price Changes Prudential Mortgage Regulations Housing Price Changes (% YoY) 13

Construction Sector is in Stagnation? #5 To prevent construction sector stagnation’s knock-on effect, government took action to back up Operating Profit & Cash Flow for Construction Companies Government’s action to prevent further deterioration • Unsold houses will be purchased by Government and private sector • Decline in housing sector is a periodical phenomenon Liquidity injection will be provided in order to prevent a bankruptcy and to protect the existing shareholders from the potential risk 1,459 construction companies (KRW 100mn, %) Operating Profit (Per company) Operating Cash Flow (Per company) “Agreement relating to Construction Companies” 184 Financial Institutions Offer1 YearFinancial Liquidity 1) 1) Construction Companies 1) Figures are based on 72 listed construction companies 14

Possibility of SME Fallouts #6 The Government also has injected financial aid for SMEs who have encountered liquidity shortfall problems arising from financial market turmoil Delinquency & Coverage Ratio Fast-Track Solutions A Comparably Sound : SME Support SMEs B Potential Risk : SME Support C Poor but high possibility of revival : Work Out D 0% of Revival Sound SMEs Decrease in SMEs’ Bank Borrowings (%, YoY) A No B Possibility of bankruptcy? Yes C Possibility of Revival? Yes D No 15

Korea’s Policies toward Financial Market Stability 1. Foreign Currency Provision • US$ 55bn to the banking sector by utilizing FX reserves (since October) • Fed-BOK Currency Swap (US$ 30bn) • Possible Expansion of Swaps with China and Japan (Existing swap line: US$ 4bn with China, US$ 13bn with Japan) 2. Three Year Guarantees of Bank’s Foreign Borrowing up to US$ 100bn • Target : Domestic banks and their overseas branches • New bond issuance from Oct 2008 to June 2009 • Aid Period : 3 years 3. Liquidity Provision • Through RP (KRW 9.5trn) and Bank Debenture (KRW 1.0trn) purchase • Credit Stabilization Fund (KRW 10trn) • Others (KRW 11.6trn) 17

Fiscal Stimulus Package Fiscal Stimulus Package: Approximately KRW 33trn (US$ 26bn, 3.7% of GDP) • Expansion of public expenditure for investing in infrastructure and strengthening social safety net (KRW 15.6trn) • Reduction in personal income and corporate taxes (KRW 17.7trn) Fiscal Stimulus Packages 18

Sound Fiscal Position and Much Room for Further Stimulus Korea’s prudent fiscal position will enable it to pursue additional fiscal stimulus, if necessary Korea continues to produce fiscal surpluses Lower debt level than OECD peers Consolidated government balance (% of GDP) Government net debt to GDP (%) e Source: Ministry of Strategy and Finance OECD Average: 77% Surplus well above its peers Government surplus (% of GDP) Source: OECD; IMF (Korea data). According to OECD, Korea’s debt to GDP ratio is 26.5% Source: S&P Sovereign Risk Indicator, July 2008, 2008 forecast data 19

Downward Trend in Inflation and Much Room for Monetary Policy Downward Trend in Inflation and Much Room for Monetary Policy Bank of Korea has proactively responded to economic slowdown by policy rate cuts Downward trend in consumer prices Policy Rate Cut in October and November 2008 CPI – Headline (%) Korea policy rate trend (%) △0.25% (Oct 9) △0.75% (Oct 27) △0.25% (Nov 7) Current policy rate : 4.00% Other Central Bank’s Equivalent Rate e 20

Economic Outlook for 2009 Job Creation GDP Growth 120,000 ~ 130,000 Original Forecast Around 3% + + 70,000 ~ 80,000 Around 1%p Policy Effect • Continued deregulations • Enhancement of labor market flexibility 190,000 ~ 210,000 Around 4% After Stimulus 22

Thank You

Korea’s Policy Initiative : To Overcome the Global Crisis