Asian Financial Crises in 1997~98

- South Korea

Presentator : Syngjoo Choi

Economics of Department

GSAS


Chronology of the Asian Crises (97~98)

Domestic (Korea) / Foreign
Jan. 1997 / Hanbo Steel (14th) bankrupt
(first bankruptcy in a decade)
March / Sammi Steel(25th) bankrupt
April / Jinro (19th) bankrupt
July / Kia (8th ; 3rd largest car maker) bankrupt / Thailand and Phillipine devalue the baht and peso, followed by the collapses of those currencies
(IMF is called in)
Aug. / Indonesian rupiah plunges
Asian stock markets plummets
Oct. / Indonesia asks IMF for assistance
Hong Kong stock market panic
Nov. / Korean Won collapses. Haitai (24th) , New-Core (28th) bankrupt.
Dec. / Korea gets IMF bail-out
Kim Dae-Jung as a new president
Jan. 1998 / Korea restructures debts / Peregrines goes bust
Rupiah falls to lowest level ever
April / A slow recovery of stock market and exchanges market / Japan begins liberalizing financial markets
Aug. / Russia declares moratorium

Essential Feature :

- A huge, sudden reversal of capital flows

* Excessive short-term foreign exchange liabilities

Possible reasons :

∙ Weakness in Korean economy

-  Strong macroeconomic performance but weak microeconomic structure

-  Rapid, unbalanced financial liberalization

∙ Self-fulfilling panic

- A bad equilibrium

∙ Exchange Rate Devaluation

∙ Moral Hazard

-  Overinvestment

-  Too big to fail


Structure of External Liabilities (Units : %)
90 / 91 / 92 / 93 / 94 / 95 / 96 / 97
Debt/GNP / 12.5 / 13.3 / 13.9 / 13.2 / 14.9 / 17.2 / 21.6 / 27.3
Short/Total / 45.1 / 44 / 43.2 / 43.8 / 53.5 / 57.8 / 58.1 / 42.5
Short/Reserves / 95.9 / 124.5 / 107.4 / 94.3 / 118 / 138.5 / 183.1 / 251.5
Structure of External Liabilities : Borrow Type
(units: millions of US $)
End 94 / End 95 / End 96 / End 97
Total Outstanding / 56599 / 77528 / 99953 / 94180
Obligations / Public / 8.7 / 8 / 5.7 / 4.2
by sector / Banks / 65.4 / 64.4 / 65.9 / 59.4
(% of total) / Nonbanks / 25.8 / 27.6 / 28.3 / 36.3
Short term debt / 40143 / 54275 / 67506 / 59444

Number of financial institutions

1990 / 91 / 92 / 93 / 94 / 95 / 96 / 97
Banks / 23 / 25 / 26 / 26 / 26 / 26 / 26 / 26
Merchant banking companies / 6 / 6 / 6 / 6 / 15 / 15 / 30 / 30
Insurance companies / 45 / 49 / 49 / 49 / 49 / 49 / 49 / 50
Securities companies / 25 / 31 / 32 / 32 / 32 / 33 / 34 / 36

Social Impact of the Crisis and

the IMF Program

-  IMF Programs

-  Structural Policy Responses


Structural Policy Responses to the Crisis

Labor markets and social protection / -  Legalized lay offs, reduction of restrictions on use of contract of dispatched workers
-  Expansion of public works and provision of income support for the poor
-  Reform of pension and health insurance systems
Financial sector / -  Resolution /rsstructuring of banking institiutions
-  Deposit insurance expanded in Jan. 1998
-  Large resolution fund introduced to remove NPLS from banks
-  Strengthening of regulations, incentives and supervision
Corporate sector / -  Restructuring : Establishment of out-of-court debt workout procedures, Legislation allowing M&As, Phasing out of cross-guarantees among companies belonging to same chaebol.
-  Strengthening performance: Improved governance (Strengthening shareholders), Greater competition



The trend of income distribution and poverty for urban households (unit; percent)
1997 / 1998
1Q / 2Q / 3Q / 4Q / 1Q / 2Q / 3Q
Gini coefficient / 0.3 / 0.282 / 0.287 / 0.281 / 0.322 / 0.328 / 0.324
Poverty Rate / 3.5 / 3.1 / 2.4 / 3 / 6.4 / 7.1 / 7.5
Notes : Poverty ratio = the ratio of households under poverty line over total households