Front Matter Page

© 2000 International Monetary Fund

February 2000

IMF Staff Country Report No. 00/11

Republic of Korea: Economic and Policy

This Economic and Policy Developments report on the Republic of Korea was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with this member country. As such, the views expressed in this document are those of the staff team and do not necessarily reflect the views of the Government of the Republic of Korea or the Executive Board of the IMF.

International Monetary Fund

Washington, D.C.

Front Matter Page

INTERNATIONAL MONETARY FUND

REPUBLIC OF KOREA

Economic and Policy Developments

Prepared by Kalpana Kochhar, Dhaneshwar Ghura, Cheng Hoon Lim, Jeanne Gobat (all APD), Kenneth Kang (PDR), Nigel Chalk (FAD) and Henry Ma (APD)

Approved by Asia and Pacific Department

December 3, 1999

Contents

• I. Introduction and Summary

  • A. Pre-Crisis Conditions

  • B. Elements of the Adjustment Program

  • C. Economic Recovery, Recent Policy Developments, and the Road Ahead

• II. Developments in Economic Activity

  • A. Introduction

  • B. The Recession of 1998: A Decomposition

  • C. The Recovery in 1999

  • D. Impact on Prices

  • E. Labor Market Developments

  • F. Economic Outlook

• III. External Sector Developments

  • A. Developments in the Current Account

  • B. Capital and Financial Account Developments

  • C. Further Liberalization of the Current and Capital Accounts

  • D. Trade Reform and Liberalization of the Services Account

• IV. Monetary Policy and Developments

  • A. Pre-Crisis Monetary Policy Framework and Key Developments

  • B. Policy Responses Following the Crisis and Key Developments in 1998

  • C. Key Monetary Developments, 1999

• V. The Fiscal Policy Response to the Crisis

  • A. A Chronology of Fiscal Developments

  • B. The Tax Policy Response to the Crisis

  • C. The Expansion of the Social Safety Net

• VI. Financial Sector Restructuring

  • A. The Financial System Before the Crisis

  • B. Reform Objectives and Program Implementation

  • C. Progress in Financial Sector Restructuring

  • D. The Remaining Agenda

• VII. Corporate Sector Reforms

  • A. Introduction

  • B. Impact of the Financial Crisis on the Corporate Sector

  • C. Strengthening the Corporate Governance Framework

  • D. Strengthening the Corporate Restructuring Framework

  • E. Progress in Restructuring the Top Five

  • F. Daewoo’s Collapse

  • G. Restructuring Second-Tier Chaebol and Other Large Corporations

  • H. Concluding Remarks

• Text Tables

  • II.1 Key Indicators of Economic Activity, 1998–99

  • III.1. Developments in the Current Account, 1997–1999

  • III.2. Volume Growth of Imports, by Selected Groups, 1995–99

  • III.3. Stock of External Liabilities, 1996–99

  • IV.1. A Regional Comparison of Growth in Private Sector Credit

  • IV.2. A Comparison of Real Interest Rates During Crises Period

  • IV.3. Composition of Corporate Debt in Selected Countries

  • V.1. Consolidated Central Government Key Aggregates, 1995–99

  • V.2. Current Expenditure 1997–99

  • V.3. Changes in the Income Distribution

  • VI.1. Progress in Financial Sector Restructuring

  • VI.2. Domestic Banks: Ownership and Capital Ratios

  • VI.3. Main Credit Exposure of the Banking System to Daewoo

  • VI.4. Total NPLs at Korean Financial Institutions

  • VI.5. Commercial Bank NPLs

  • VI.6. Use of public Funds in Financial Sector Restructuring

  • VII.1. Emergency Loans

  • VII.2. Bank Lending, by Company Size

  • VII.3. Private Securities Issues by Company Size

  • VII.4. Net Bank and Nonbank Lending to the Top Chaebol

  • VII.5. Cross Ownership of Top 5 Chaebol

  • VII.6. Top 5 Chaebol Debt Development, 1997–1999

  • VII.7. Summary of Debt Restructuring Methods and Application

• Boxes

  • I.1. Chronology of Main Pre-Crisis Events and Early Policy Responses

  • II.1. Comparison of Korea’s Recovery with Other Crisis Countries

  • III.1. Debt Restructuring Agreement with Commercial Banks

  • IV.1. Definition of Monetary Aggregates

  • IV.2. Credit Slowdown or Credit Crunch?

  • IV.3. Support to Small- and Medium-Sized Enterprises (SMEs)

  • V.1. Unemployment Insurance-Comparison with Selected Countries

  • VI.1. The Korea Asset Management Corporation

  • VI.2. Foreign Investment in the Financial Sector

  • VI.3. The Link Between Corporate and Bank Restructuring

  • VI.4. The Investment Trust Industry in Korea

  • VII.1. Big Deals

  • VII.2. Restructuring of 6-64 Chaebol. Hanwha

• Charts

  • I.1. Capital Flows, Reserves and External Liabilities

  • II.1. Real Sector Activity, 1997–99

  • II.2. Real GDP and Demand Components, 1997–99

  • II.3. Manufacturing Output in Selected Sectors, 1997–99

  • II.4. Price Developments, 1996–99

  • II.5. Labor Market Developments, 1997–99

  • III.1. Current Account Balance, 1997 Q3–1999 Q3

  • III.2. Real Effective Exchange Rate, 1995–1999

  • III.3. Export Volume Growth, 1997 Q3–1999 Q2

  • III.4. Share in Total Exports by Area of Destination 1997 Q3–1999 Q2

  • III.5. Export Unit Values, 1993-1999 HI

  • III.6. Import Ratios for Export and Industrial Use 1997 Q3–1999 Q1

  • III.7. Net Private Transfers from Overseas, 1997 Q1–1999 Q2

  • III.8. Capital and Financial Account Balance 1998 Q1–1999 Q3

  • III.9. Foreign Direct Investment, 1997 Q3–1999 Q2

  • III.10. Net Equity Inflows, 1997 Q3–1999 Q3

  • III.11. Shareholding by Foreign Investors, 1993–1999

  • III.12. Yield Spreads on Korean Sovereign Bond Issues, July 1997-November 1999

  • III.13. Rollover Rates on External Borrowing of Domestic Financial Institutions 6/97–9/99

  • III.14. Gross Foreign Direct Investment in Korea, 1993–1998

  • IV.1. Exchange Rate and Stock Market Index, 1990–1997

  • IV.2. Money Developments, 1990–1997

  • IV.3. Stabilizing the Foreign Exchange Market, 1997–99

  • IV.4. Money Developments, 1997–99

  • IV.5. Money Multiplier and Changes in Velocity, 1997–1999

  • IV.6. Real Private Sector Credit, 1997–1999

  • IV.7. Corporate Debt Servicing Burden, 1997–1999

  • IV.8. Interest Rate Spreads, 1997–1999

  • IV.9. Domestic Interest Rates

  • V.1. Central Government Debt-GDP

  • V.2. Growth Forecasts and Budget Plans, 1998

  • V.3 Actual and Cyclically Neutral Budget Balance

  • VI.1. Stock Market Developments, 1997–1999

  • VI.2. ITC Fund and BSF Activity, July 1999–October 1999

  • VI.3. Ratio of Nonperforming Loans

  • VII.1. Structuring of Liabilities: Manufacturing Sector, 1985–1998

  • VII.2. Profitability Indicators: Manufacturing Sector, 1985–1998

  • VII.3. Profitability and Debt Indicators: Manufacturing Sector, 1985–1998