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Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond

Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond. January, 2009. Economic Policy Direction in 2009 Measures Taken Against the Global Financial and Economic Crisis Strong Pillars Supporting the Economy Current Issues & Answers

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Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond

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  1. Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond January, 2009

  2. Economic Policy Direction in 2009 • Measures Taken Against the Global Financial and Economic Crisis • Strong Pillars Supporting the Economy • Current Issues & Answers • Restructuring for a Big Take-Off Beyond the Crisis

  3. Year 2009 Economic Outlook

  4. External Environment Economic Policy Direction in 2009 Amid an unprecedented crisis, the world has been facing ‘Survival Game’ and ‘Historic Power Shift’ First Stage Second Stage Third Stage “Survival” “Turnaround” “Take-off” Overcoming the Crisis Preparing For the Future New Growth • Liquidity Provision • Timely Fiscal Expansion • Job Creation • Social Safety Nets • Restructuring • Human Resources • Green New Deal • Public Sector Sliming • R&D Investment • New Growth Engine • Eco-Friendly industries • Globalization

  5. Economic Policy Direction in 2009 • Measures Taken Against the Global Financial and Economic Crisis • Strong Pillars Supporting the Economy • Current Issues and Answers • Restructuring for a Big Take-Off Beyond the Crisis

  6. Measures Taken Against the Global Financial & Economic Crisis1. Fiscal Stimulus Package2. Securing FX Liquidity3. Financial Market Stabilization4. Job Creation / Sharing / Training5. SME’s Liquidity Support6. Construction Sector Support

  7. 1. Fiscal Stimulus Package Tax cut and fiscal expansion will boost domestic economy Fiscal Stimulus Packages Government Debt Level Lower than OECD Peers 2008(E) General Government Gross Financial Liabilities to GDP(%) OECD average : 79.7% Source: OECD Economic Outlook, Nov 2008

  8. 1905.6 Increased to USD201.2bnas of Dec 08 Source: IMF, as of Nov 08 (Sep for China) 2. Securing FX Liquidity Provide sufficient FX liquidity and keep FX reserve at a sound level Diverse FX Liquidity Provision Measures Will Stabilize FX Market Liquidity Provision Direct FX Liquidity Provision : USD55bn FX Swap Line Total USD90bn with US, China and Japan Government Guarantee Borrowings of banks up to USD100bn Foreign Exchange Stabilization Fund Increased to KRW20.6trn from KRW10trn Adequate Amount of Foreign Reserves 6th Largest Reserves Globally FX Reserve Ranking ($bn) Korea’s FX Reserves Trend ($bn) 201.2

  9. 3. Financial Market Stabilization I Liquidity provision to stabilize domestic capital markets Interest Rate Cuts Liquidity Provision Into Money Market Korea Policy Rate Trend (%) 5.25% Δ2.75%sinceOct 2008 2.50%

  10. 3. Financial Market Stabilization II Stabilization fund will provide liquidity to financial markets Debt Market Stock Market Bond Market Stabilization Fund Supporting Capital Markets Investors • Market stabilization by operating Stock Market Stabilization Fund (KRW0.5trn) • Providing tax incentives for long-term holdings of funds to strengthen stability of the stock market and asset management companies KDB Banks Insurers Securities KRW2trn KRW6trn KRW1.5trn KRW0.5trn Bond MarketStabilization Fund KRW10trn Target Market Corporate Bond PF-ABCP SME P-CBO Credit Card Companies’ Debenture

  11. 3. Financial Market Stabilization III Stimulating self-financing and Bank Recapitalization Fund will increase banks’ loan capacity Commercial Banks Bank Recapitalization Fund Banks’ Balance Sheet BOK Institutional Investors KDB Risk Weighted Assets : KRW771trn Liabilities KRW10trn KRW8trn KRW2trn Equity : KRW82trn Bank Recapitalization FundKRW20trn Mortgage KRW7trn NPLKRW3trn Securitizingby KHFC Purchasingby KAMCO Capital Injection by Bank RecapitalizationFund (KRW20trn) Banks The Fund is expected to improve BIS ratio by 2.6% Improving Banks’ Soundness to Increase Loan Capacity

  12. 4. Job Creation / Sharing / Training SOC investment, internship and support for job creating companies will create new jobs Job Opportunities for Young People Green Growth for Green Job Green New Deal : Eco-friendly SOC investment spending KRW50trn and creating 960,000 jobs over next 4 years InternshipforYoung People • 23,000 in public sector • 25,000 in SMEs Job Creation Economic Growth Engine Global Leadership Program • 13,000 for future growth engine • 19,000 for global leadership Infrastructure • 4 biggest rivers redevelopment • Eco-friendly transit system • SOC for forming economic zone Job Creation in the Social Service Sector Technology • Alternative water resources • Low-carbon, high efficient technologies • ITㆍSW investment 126,000 Social Service Jobs to be Offered in 2009 Life Environment • Biomass • Eco-friendly buildings Encouraging Corporation to Create More Jobs Direct Liquidity Provision • Providing KRW10trn through KDBto companies creating mass jobs

  13. KRW68trn Sound SME’s A Sound : SME Support KRW54trn B Potentially Risky : SME Support C Risky but Recoverable : Workout IBK D Irrecoverable : Liquidation A KDB NO B YES C PossibleBankruptcy? YES KRW25.2trn D NO KRW13.5trn +12trn Recoverable? KIBO Shorten the assessment process from 3 months to 15 days for timely liquidity provision KODIT 5. SMEs Liquidity Support Expanding additional liquidity support of KRW50trn will ease credit squeeze for SME’s Fast-Track Solutions for SMEs State-Owned Banks SMEs Liquidity Support Increasing Loan Capacity by Capital Injection +14trn Credit Guarantee Fund Expanding Credit Guarantee Support + Bank Recapitalization Fund (KRW20trn)

  14. Buy Unsold Houses Unsold houses are being purchased by Government and private sector Lower Mortgage Interest Rate Encouraging mortgage interest rate’s decrease by capital injection to KHFC Deregulation Stimulating real estate market by deregulation regarding reconstruction and real estate transaction 6. Construction Sector Support Liquidity provision for constructors and various support measures will stabilize construction sector Liquidity Provision for Constructors Boost Real Estate Market Financial Support & Restructuring Led by Creditors Constructors Sound SupportedbyCreditor Banks A Potentially Risky Debt Rescheduling by Creditor Banks All B Small/Medium Fast Track Risky but Recoverable C Workout Irrecoverable D Liquidation

  15. Economic Policy Direction in 2009 • Measures Taken Against the Global Financial and Economic Crisis • Strong Pillars Supporting the Economy • Current Issues and Answers • Restructuring for a Big Take-Off Beyond the Crisis

  16. Strong Pillars Supporting the Economy1. Sustainable Surplus of the Current Account2. Consecutive Fiscal Surplus3. Financial Strength of the Corporate Sector4. World-class Industrial Competitiveness

  17. 1. Sustainable Surplus of the Current Account The current account balance is to show surplus in 2009 despite sluggish exports External Conditions Current Account Surplus Expected in 2009 Current Account Balance 4.8 2.1 Source: Bank of Korea Oil Price Decrease 1) Increase of Oil Import 2) Assumed Average Oil Price of USD60/ barrel Source: Bloomberg

  18. 2. Consecutive Fiscal Surplus Korea’s prudent fiscal position enables it to pursue additional fiscal stimulus, if necessary Continuing Fiscal Surplus Surplus Well Above Among Its Credit Ratings Peers Consolidated Government Balance (% of GDP) Government Surplus (% of GDP) Source: Ministry of Strategy and Finance Source: S&P Sovereign Risk Indicator, Jul 2008, 2008 forecast data

  19. 3. Financial Strength of the Corporate Sector Corporate sector is financially strong and sound Dramatically Decreasing Debt/Equity Ratio Consistently High Operating Income to Sales Debt to Equity Ratio Trend Operating Income/Sales Source: Band of Korea, 1 For manufacturing companies Increasing Quick Asset Quick Assets of Listed Companies

  20. 4. World-class Industrial Competitiveness Robust industrial base and world- renowned manufacturing companies Semi-conductor (DRAM, NAND Flash Memory) production : World’s No. 1 PDP production : World’s No.1 Shipbuilding orders : World’s No. 1 Mobile phone production : World’s No. 2 Automobile production : World’s No.5 Technological & Industrial Powerhouse Cutting Edge IT Industry World’s 1st CDMA based DMB service provider (May ’05) World’s 1st in high-speed internet penetration for 4 consecutive years(’02~’05) World’s 3rd in number of internet users (IMD World Competitiveness Yearbook 2005) World’s 3rd IT competitive country (Economist Intelligence Unit 2007) Global Innovation Index Source: INSEAD, Jan. 6, 2009

  21. Economic Policy Direction in 2009 • Measures Taken Against Global Financial and Economic Crisis • Strong Pillars Supporting the Economy • Current Issues and Answers • Restructuring for a Big Take-Off Beyond the Crisis

  22. Current Issues and Answers1. Household Debt Risk2. Korean Banks’ FX Position3. Soundness of Korean Banks’ Loan4. Better Positioned in Shipbuilding Industry

  23. 1. Household Debt Risk Household debt is low-risk and new measures will help improve households’ financial status Relatively low Financial Debt/GDP Ratio Delinquency Ratio of Mortgage Loans Delinquency ratio (%) Financial Debt/GDP Ratio (%) * UK as of Dec 2007, others as of Jun 2008 Mortgage Loans in Korea are Safe Due to Low LTV Level Household Financial Assets is 2 times larger than Debt * Korea LTV ratio 47% on Sep 2008

  24. 2. Korean Banks’ FX Position Korean banks have no currency mismatch problem Foreign currency financing/operation - Korean banks Jun 2008 Dec 2008(E) *Assumed that all the Government’s supply has been provided to domestic banks.(Some might be provided to foreign banks branches.)

  25. 3. Soundness of Korean Banks’ Loans Korean banking sector is sound and has sufficient room to withstand risks Moderating Loan Growth Low Delinquency Ratio Loan Growth(%) Delinquency Ratio(%) Sufficient Room to Withstand Further Default Risk Moderate Loan-to-Deposit Ratio • Sufficient buffer to absorb the impact of further default risk ① Coverage ratio is approximately 175.1% (Sep.2008) ② NPL → 0.8% (Sep.2008) / LTV 47% (Sep.2008) • Stringent risk management systems implemented after Asian Financial Crisis • Well-diversified lending exposure to various sectors - Manufacturing 35.2%, Real Estate 17.1% Private Sector 14.3%, Construction 9.7% Loan-to-Deposit Ratio(%) * US : 112% (Including CD, as of July 2008)

  26. 4. Better Positioned in Shipbuilding Industry 90% 10% Korean shipbuilding companies are well-positioned to withstand the recent deterioration in the global shipbuilding market Share of Top 7 Companies Market Share among Domestic Shipbuilders Amount (100mil) Proportion 15% 85% 15% 85% Increase in Global Market Share in 2008 Proportion of Bulk Carrier for Top 7 Shipbuilders Market Share (%) 10% 90%

  27. Economic Policy Direction in 2009 • Measures Taken Against the Global Financial and Economic Crisis • Strong Pillars Supporting the Economy • Current Issues and Answers • Restructuring for a Big Take-Off Beyond the Crisis

  28. Early Signs of Turnaround Market reacted favorably to the Korean government’s decisive measures Korean Government’s Measures Increasing Foreigners’ Net Buying of KOSPI Decreasing Korea CDS Spread

  29. Restructuring for a Big Take-off beyond the Crisis Korean government learned its lesson from the 1997 crisis: immediate and efficient restructuring should be executed to provide intensive support to healthy firms and increase competitiveness of Korean economy Creditor Banks Will Execute Restructuring Plan Through Mediation Committee Creditors Financial Services Commission (coordination, policy response) Financial Support & Restructuring Led by Creditors Temporary Liquidity Squeeze Financial Support Mediation Committee for Credit Financial Institutions Coordination Signs of Insolvency Restructuring Corporate Restructuring Coordination Committee The Irrecoverable Liquidation Corporate Restructuring The Korea Economy is Fully Prepared to Move Further and Higher Than Its Peers

  30. Thank You!

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