Republic of Korea: Selected Issues
Author: International Monetary Fund
Publication Date:
12 Feb 2002
eISBN:
9781451822069
Language:
English
Keywords:
ISCR; CR; company; contraction; business cycle; bank financing; beneficiary certificate; lending to business; share of securities; business lending; Bank credit; Loans; Credit
Download PDF (1 MB)

This Selected Issues paper focuses on some of the key stylized facts of Korean business and export cycles over 1960–2001, and calculates a chronology for the classical cycle in these series by applying a variant of the Bry and Boschan (1971) cycle-doling algorithm. It highlights that the Korean classical business cycle and exports cycles are extremely asymmetric, as they exhibit long-lived expansions and much shorter-lived contractions. The results also indicate that the probability of ending a contraction or expansion phase in Korean industrial production and Korean real exports is independent of their duration.

Abstract

This Selected Issues paper focuses on some of the key stylized facts of Korean business and export cycles over 1960–2001, and calculates a chronology for the classical cycle in these series by applying a variant of the Bry and Boschan (1971) cycle-doling algorithm. It highlights that the Korean classical business cycle and exports cycles are extremely asymmetric, as they exhibit long-lived expansions and much shorter-lived contractions. The results also indicate that the probability of ending a contraction or expansion phase in Korean industrial production and Korean real exports is independent of their duration.

III. Changes in the Structure of Financing in Korea1

This paper analyzes changes in the financial balance sheets of Korean households and businesses during 1980–2001 to illustrate larger changes in the Korean financial structure, with special focus on the subperiod 1997–2001. There has been a gradual shift to capital market financing, but the financial structures of Korean households and businesses still closely resemble those in bank-centered Japan. Since 1980, businesses have gradually reduced their reliance on bank lending and have turned toward securities issuance for funds. Households, however, have not directly purchased these assets, preferring to channel their savings through financial institutions, which in turn have increased their holdings of securities and stocks. However, the trend toward capital markets has gained momentum since the economic crisis: (a) the stock and bond markets have grown fast; (b) the number of individual stockholders and their trading have increased; and (c) businesses have further reduced their reliance on bank loans. With the increased openness of the economy, the role of foreign finance (especially FDI) has also grown rapidly since 1998.

A. Introduction

1. The growth and structure of the financial system influence economic growth through their effect on savings, the allocation of capital, and the cost of financial intermediation. Hence, the interactions between financial markets and the real economy are of special interest to policy analysts and policy makers. In the case of Korea, its rapid growth over the period 1980−97, the economic crisis that erupted in 1997, and the far-reaching efforts that have been undertaken since 1997 to restructure the corporate and financial sectors provide an interesting backdrop for analyzing these interactions.

2. This paper uses data from the Flow of Funds Accounts (FOF) (see Box III.1) to describe the changes that have occurred to the Korean financial sector during 1980–2001. The focus is on households and businesses and particular attention is devoted to the subperiod 1997–2001. The following questions are examined:

The Flow of Funds: Key Concepts

The Flow of Funds Accounts (FOF) of the Bank of Korea (BOK) present a composite picture of the financial surpluses and deficits of the five sectors comprising the Korean economy. These sectors are: • households (the “individual sector” in the BOK database), which include small private unincorporated companies and nonprofit organizations);

  • businesses, which include public corporations;

  • financial institutions;

  • government; and

  • the rest of the world.

FOF data have been compiled in Korea since 1965 and are available on the BOK’s website (www.bok.or.kr, “Statistics Database”). For each period (a quarter or a year), a matrix is presented. Matrix rows consist of financial and capital transaction categories, and matrix columns consist of institutional sectors and their sources and uses of funds.1 The accounts show financial balances (the balance between saving and investment) and describe how these balances flow into financial markets, and to whom and in what manner these funds are supplied. Data on stocks of financial assets and liabilities are also compiled, based on information from the quarterly flows.

For the purposes of this paper, the following key terms are used:

  • Internal funds are self-generated funds, which are not channeled through financial institutions. They are classified as “Savings” in the nonfinancial transactions Section III of the FOF. Businesses, for example, may use retained earnings.

  • External funds are funds obtained from financial institutions, financial markets, foreign sources, etc.

    • External funds can be further divided into domestic funds (i.e., financing obtained from Korean sources) or foreign funds (e.g., foreign direct investment).

    • Alternatively, they can be classified into: indirect financing, which is channeled through financial institutions (e.g., bank loans); or direct financing, which is obtained through financial markets (e.g., stocks and bonds). Bank-based economies, like Japan or Germany, rely mainly on indirect financing, while economies where capital markets play a bigger role (e.g., the U.S. and the U.K.) rely more on direct financing.

Some caveats should be noted:

  • Due to changes in financial asset prices and exchange rates, the data on flows and stocks may not be consistent.

  • Due to differing definitions, there may be inconsistencies between the FOF and data from the monetary authorities and the balance of payments statistics compilers.

  • Data on stocks of real assets (e.g., physical plant and offices) are not provided in the FOF. Data on the stock of foreign trade credit are also unavailable, pending the results of the project to compile Korea’s International Investment Position.

  • Due to differences in how sectors are defined in each country, international comparisons are only approximate. The comparisons provided in this paper are drawn from Bank of Japan (2000).

1 More detailed technical information can be found in Bank of Korea (2001), and in the periodic presentations of FOF updates in the BOK’s Quarterly Bulletin. For an exposition of FOF methodology, see: Fitzpatrick (2001). For similar work in other countries, see: Bank of Japan (2000, 2001), Mcintosh (2001), and Mcintosh et al (2001).

  • What are the stylized facts of Korean financial development, as revealed in FOF data? Has there been a move toward capital markets and away from bank financing? How does the current structure compare with other economies?

  • What was the impact of the crisis that erupted in 1997 on the structure of financing? Has the movement toward capital markets accelerated since then? Are there indications whether these changes will be permanent?

  • Recently, lending to households has boomed, while lending to businesses has slackened. What are the implications for growth and vulnerability of this development?

B. Overall Developments2

3. The size and scope of the Korean financial sector have grown substantially since 1980.3 Between 1980 and 2000, the stock of financial assets outstanding rose from 300 percent of GDP to almost 700 percent (see Figure III. 1). Almost every type of financial instrument has increased as a proportion of GDP, with holdings of securities showing the most notable increase.

Figure III.1:
Figure III.1:

Economy-Wide Stocks of Financial Assets

(In percent of GDP)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

4. There has been a gradual shift toward capital market financing. Although loans remain the single largest source of credit, their importance relative to other financial instruments has fallen since 1980. By contrast, the share of bonds and stocks as financial instruments has almost doubled (see Figure III.2). Complementary data also show that this trend has deepened since 1997:

Figure III.2:
Figure III.2:

Selected Financial Instruments

(In percent ?r total financial assets)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

  • The market capitalization of the Korea Stock Exchange (KSE) rose from a precrisis level of 28 percent of nominal GDP in 1996 to 44 percent of GDP in 2001.

  • Similarly, in the bond market, the total amount of corporate bonds outstanding (about 45 percent of all bonds) rose from about 19 percent of GDP (W 86 billion) before the crisis to 27 percent (W 145 billion) in 2001. The volume of corporate bond trading has tripled since 1996.4

5. The increasing volume of bonds and stocks has been purchased by financial institutions, rather than directly by individuals. Households continue to hold the bulk of their wealth in the form of deposits and insurance and pension policies (see Section C) and have only recently increased their holdings of stocks. Instead, households have channeled their savings into financial institutions, which in turn have purchased securities and stocks. Thus, financial institutions’ share of bond and stock holdings has almost doubled since 1980, while the share directly held by households has fallen (see Figure III.3 and Appendix Table III.2). Meanwhile, with the increasing openness of the economy to foreign capital, foreign ownership of Korean stocks has steadily risen, from zero in 1980 to 25 percent in 2000.

Figure III.3:
Figure III.3:

Sectoral Holdings of All Financial Assets

(In percent of economy-wide total)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

6. Since the crisis, commercial bank financing has rebounded strongly and the nonbank sector’s role has been sharply reduced. Lending by banks is now a larger share of GDP than lending by nonbanks. Due to these contrasting developments, total credit to the private sector credit from banks and all other financial institutions has fallen as a share of GDP, due initially to the economic downturn and later to government-promoted efforts to deleverage.

Private Sector Credit

(In percent of GDP)

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7. Within the banking sector, credit has shifted away from businesses and toward households and small enterprises. In late-2001, bank credit to households was double its end-1997 level, whereas bank credit to businesses had grown by only 20 percent. Among businesses, small enterprises’ share of all business lending by banks rose from 75 percent in 1998 to about 78 percent in mid-2001. However, the data may understate the shift to small enterprises, as part of the lending to households in fact goes to shopkeepers and other small ventures.

C. Households

8. Korean households’ financial wealth has grown fast. The fast growth of output and incomes during 1980–2000 and high savings rates led to a robust increase of Korean households’ stock of wealth (financial and nonfinancial).5

  • Household disposable income grew by about 7 percent per annum in real terms. Meanwhile, households’ financial assets grew by 13 percent per annum in real terms.

  • Consequently, financial assets in nominal terms rose from 95 percent of disposable income to 232 percent, while financial liabilities grew from 36 percent to 96 percent of disposable income. Hence, financial net worth more than doubled, from 59½ percent to 136½ percent of disposable income (see Figure III.4).6

  • In per capita terms, the average Korean held $915 of financial assets in 1980; by 2000, this sum had grown to $15,000. This was equivalent to an annual growth of 11 percent in real dollar terms.

Figure III.4.
Figure III.4.

Korean Households’ Net Worth

(In percent of disposable income)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

9. Korean households are cautious and hold the bulk of their wealth as currency, deposits, life insurance, and pension policies. Currency and deposits account for about 60 percent of financial wealth, up from 47 percent in 1980–84 (see Figure III.5). Meanwhile, the share of insurance and pension policies rose from 11 percent to 18 percent over the same period. By contrast, the share of securities (other than stocks) remained unchanged at 12–13 percent until 1998. That year, as the ITC (investment trust company) sector boomed, households’ purchases of “beneficiary certificates” jumped, and the share of securities rose to 15 percent. As the ITC sector contracted in 1999–2000, beneficiary certificates were sold or fell in value. Thus, by 2001, the share of securities had fallen to 10 percent.

Figure III.5:
Figure III.5:

Korean Households’ Financial Assets

(In percent of total)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

10. Korean households’ portfolios most closely resemble those of Japanese households. As Figure III.6 shows, the composition of household financial assets is broadly similar in both countries. Even compared to Germany, which until recently, has been very bank-centered, Korean households’ direct participation in capital markets (through holdings of securities and stocks) is unusually low.

Figure III.6:
Figure III.6:

Cross-country Comparison of Households’ Financial Assets

(In percent of total)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

11. Households’ participation in the stock market is not as widespread as in the US, but is comparable to Europe. In the US, about 50 percent of all households own stocks and about 50 percent of stocks outstanding are held by households. By contrast, in 2000, only 7 percent of Korean households’ financial wealth was held as stocks, and only 22 percent of all stocks outstanding in the economy were held by households. The share of stocks held by households is comparable to Japan and Europe (see Figure III.7).

Figure III.7:
Figure III.7:

Cross-country Comparison of Sectoral Holdings or Stocks

(In percent of total)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

12. There are signs that a “stockholder culture” is emerging:

  • As Korean stock markets boomed in 1999, households allocated 22 percent of their purchases of financial assets that year to stocks, causing the share of stocks in their portfolios to rise from 7 percent to 7¼ percent.

  • Between 1997 and 1999, the number of individual investors in the Korea Stock Exchange grew from 1.3 million (3 percent of the population) to 2.9 million (6 percent).7

  • Korean households that participate in the stock market are very active traders. Although they hold only about 20 percent of all stocks, they account for over 70 percent of trading. On-line trading, in particular, has risen in popularity, with the value of online transactions growing from W 11½ trillion in 1998 to W 1,348 trillion in 2000.

With the weakening of the stock markets in 2000, the flow of household funds to the stock market understandably slackened.

13. On the liability side, households are also cautious and rely on internal funds rather than borrowing from external sources. On average, households obtain two-thirds of their annual inflow of funds from their own resources, reflecting the high savings rate in Korea.

14. Loans remain the largest source of external financing for households. Loans were 89 percent of households’ financial liabilities in 1980–84. By 1999, that share had fallen to 83 percent (see Figure III.8). However, in 2000–01, banks substantially redirected credit away from the overleveraged corporate sector (especially the chaebol) and toward households and small and medium enterprises, pushing total loans back up to 89 percent of total household liabilities.

Figure III.8:
Figure III.8:

Korean Households’ Sources of External Finance

(In percent of total liabilities)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

  • At the end of 1997, loans to households were 30 percent of all bank lending. By September 2001, their share had jumped to 42 percent.

  • Loans to households now account for 28 percent of GDP, compared to 13 percent in 1997.

Over the longer ran, however, the share of bank loans in total household liabilities has fallen, while the share of other financial institutions has risen, chiefly owing to the category “other loans”.

15. Specifically, new forms of consumer finance have boomed. In the 1980s, the only source of external financing that significantly competed with bank loans was “domestic trade credit” (e.g., merchants’ charge accounts). Since 1990, however, the categories “other loans” (finance, credit card, leasing, and venture capital companies) and “miscellaneous” (credit card loans, payment advances, retirement allowance reserves, etc.) have grown rapidly and now exceed domestic trade credit. There are some problems with the FOF data for these categories because the statistical base may not have adequately kept up with the rise of new financial institutions. Nevertheless, complementary data confirm the robust growth of consumer finance, especially credit cards:

  • Data from the BOK’s financial surveys show that credit card and merchandise credit doubled as a share of households’ disposable income between 1999 and 2000. By contrast, housing loans have grown much more slowly.

  • The National Tax Service estimates that credit card usage rose from W 43 trillion in 1999 to about W 125 trillion in 2001.

  • More recently, data from the Financial Supervisory Service (FSS) show that, during January–September 2001, sales conducted with credit cards were 113 percent higher than in the same period last year. In September 2001, the average number of cards held per person was three and a half, compared to three in June 2001.

Household Credit

(year-on-year growth rates)

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16. With the growth of consumer finance, credit card delinquency has risen slightly.

  • According to the FSS, overdue payments on credit cards rose from about 7.9 percent in end-2000 to 8.4 percent in September 2001, raising the ratio of bad loans to total credit card receivables from 2.1 percent to 3¼ percent.

  • The number of individuals unable to make monthly credit card payments jumped from 954,000 in August 2001 to 1 million in December 2001, while the number unable to pay finance companies rose from 2½ million at the end of 2000 to 2 3/4 million in October 2001.

  • However, for personal loans by banks, the delinquency rate has remained constant at about 1¼ between December 2000 and September 2001.

17. Despite the rapid increase in debt, the household sector’s solvency remains healthy. Financial liabilities as a proportion of disposable income have fallen, while net worth has risen (see Figure III.4). Further, although the share of households in total lending has increased, its current level of 42 percent is still below that of other advanced economies (Moon, 2001). Nevertheless, supervisory authorities should strengthen oversight of lending to households to ensure that the rise in lending to this sector is not accompanied by a deterioration in the quality of loans and rising credit losses.

D. Businesses8

18. The composition of business finance has changed substantially since the crisis. First, financing for businesses has shrunk, as businesses have reduced leverage, and as financial institutions have reduced their exposure to businesses. Second, the role of direct finance has increased, mainly through the stock market. Third, the role of foreign capital, especially FDI, has also increased.

19. The 1997–99 crisis forced businesses to resort to internal financing.9 Before 1997, the share of internal funds had been only about 30 percent of the annual inflow. Since then, about half of all funds raised by businesses has come from their own saving (see Figure III.9 and Appendix Table III.8). In nominal terms, the net inflow of external finance halved between 1997 and 1998 and has remained the same since then. In real terms, net external financing is back down to its level in 1989. However, this contraction does not necessarily indicate that the business sector is being starved of funds, as previous inflows may have financed excessive investment.

Figure III.9.
Figure III.9.

Korean Businesses’ Sources of Finance

(In percent of total sources)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

20. Businesses’ reliance on direct finance has increased (see Figures III. 10–11):

Figure III.10:
Figure III.10:

Korean Businesses’ Sources of External Finance

(In Percent of Total Inflows)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

Figure III.11:
Figure III.11:

Korean Businesses’ Sources of Loans

(In Percent of Total Inflows)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

  • Loans in general have shrunk in importance as a source of external finance, but within that category, the share of bank lending has increased. Before 1997, lending was the main source of funds for businesses. In 1998, with the banking sector in crisis, loans were actually negative as businesses had to repay debt without obtaining new loans. Since then, the share of lending has picked up, but has not recovered its precrisis level, as banks have resumed lending, while the nonbank sector (e.g., merchant banks) has shrunk in size. Further, the composition of bank lending has changed, as banks have shifted their focus to small and medium enterprises, which are still relatively underleveraged.

  • There have been sharp swings in the share of securities in business finance. In 1998, with bank loans drying up, business resorted to issuing medium-term securities (mainly three-year corporate bonds), whose share soared to 168 percent of the annual inflow. These securities were mainly bought by the ITCs, the traditional purchasers. However, as the ITC sector collapsed in 1999–2000, issuing bonds became unfeasible.10 Issuances (excluding asset-backed securities) fell by about 33 percent in 2000, and maturities tended to shorten.

  • With loans and bonds being erratic sources of financing, businesses have increased their reliance on the stock market. Since the crisis, the amount of financing through equity issuance has almost doubled. The stock market boom of 1998–99 coupled with further liberalization of the capital account attracted funds from domestic investors and foreign portfolio investors.

21. The role of foreign finance has grown (see Figure III.12):

Figure III.12:
Figure III.12:

Korean Businesses’ Sources of Foreign Finance

(In percent of total inflows)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

Figure III.13:
Figure III.13:

Cross-country Comparison of Sources of Business Finance

(In percent of total Inflows)

Citation: IMF Staff Country Reports 2002, 020; 10.5089/9781451822069.002.A003

  • The share of FDI has jumped. With policy reforms to allow increased foreign participation in the Korean economy, including through purchases of troubled corporations, FDI inflows more than doubled in 1998. Between 1997 and 2000, the volume of FDF quadrupled, and its share rose from 2 percent of total business financing to 13 percent.

  • Foreign trade credit contracted in 1998, but has recovered. Trade credit turned into a net outflow during the crisis, as short-term funding dried up in general. By 2000, however, the share of foreign trade credit was three times that in 1996.

  • The increased role of FDI has positive long-term implications. If sustained, it would further Korea’s integration in the global market and foster the transfer of technology and management practices. The entry of foreign investors would also have the potential to strengthen corporate governance and market discipline.

22. Despite the recent changes, the financial structure of Korean businesses still looks much like Japan’s. Thus, dependence on bank loans is still higher than in Europe or the U.S., while the share of securities and stocks is still much lower.

E. Conclusion

23. The growth in the role of direct financing and capital markets has sped up since 1998, partly due to restructuring efforts initiated during the economic crisis. Businesses, spurred by requirements to deleverage, have reduced their reliance on bank loans, and have turned to issuances of securities and foreign capital. For their part, banks have turned their attention to the relatively underleveraged households and small enterprises. Meanwhile, households’ participation in the securities and stock markets has increased.

24. However, banks will continue to be important. In fact, with the sharp contraction of the nonbank sector, banks have increased their share of total credit, mainly due to increased lending to households for consumption. Household debt levels have increased rapidly, but their solvency is still healthy. Nevertheless, stronger oversight of consumer lending will be important, along with broader efforts to strengthen the effectiveness of supervision.

25. The increased role of direct finance has implications for corporate governance. In bank-centered economies, supervision of borrowers is exercised through close monitoring by creditors. In economies with a larger role for capital markets, corporate governance is also exerted through shareholder activism, takeovers, and buyouts. In the case of Korea, shareholder initiatives have begun to emerge, and could be reinforced with the growth of capital markets. Meanwhile, foreign investors could also be a new source of shareholder pressure.

26. The recent changes in the structure of financing could also have an impact on the monetary transmission mechanism. Further research could be done on the implications of the following:

  • The growth in the size of household assets (especially stocks), is likely to imply a significant rise in the strength of the wealth effect, as Mylonas et al (2000) note. In this connection, Choe and Lee (1999) find that the effect of stock price fluctuations on consumption has risen since the 1980s, and this may be related to the increased size and breadth of household wealth.

  • “Credit channel” theories of monetary policy (e.g., Bemanke and Blinder, 1992) argue that the contraction of bank credit that accompanies a monetary tightening provides an additional channel for monetary transmission. This channel is especially relevant for entities that are dependent on bank loans, which has been the case for most Korean firms until recently. However, with the rise of alternatives to bank loans, this additional channel could weaken in Korea.

APPENDIX

Table III.1

Distribution of Types of Financial Assets

(In percent)

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Source: Bank of Korea, Flow of Funds, (www.bok.or.kr)
Table III.2.

Distribution of Selected Financial Assess, by Type of Holder

(In percent)

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Source: Bank of Korea, Flow of Funds, (www.bok.or.kr)
Table III.3.

Distribution of Selected Financial Liabilities, by Type of Debtor

(In percent)

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Table III.4.

Households’ Financial Assets and Liabilities

(In percent of disposable income)

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Source: Bank of Korea, Flow of Funds, (www.bok.or.kr)

Disposable income for 2000 is an estimate.

Table III.5.

Households’ Financial Assets and Liabilities

(In percent of totals)

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Source: Bank of Korea, Flow of Funds, (www.bok.or.kr)
Table III.6.

Financial Liabilities of Businesses

(In percent of total)

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Source: Bank of Korea, Flow of Funds, (www.bok.or.kr)
Table III.7.

Asset Accumulation by Businesses

(In billion won; growth rates in parentheses)

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Source: Bank of Korea, Flow of Funds, (www.bok.or.kr)

Deflated using the GDP deflator.

Table III.8.

Sources of Financing for Businesses

(In units indicated)

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Source: Bank of Korea, Flow of Funds, (www.bok.or.kr)

Internal funds are “Savings” in the nonfinancial transactions section of the Flow of Funds.

External funds are “Sources” in the financial transactions section of the Flow of Funds.

Mainly commercial paper

Mainly corporate bonds

Deflated using the GDP deflator.

References

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1

This paper was prepared by Henry Ma (APD).

2

Park (1994) and Choe and Moosa (1999) also use FOF data to survey Korean financial development, but they do not deal with the impact of the crisis.

3

Detailed data tables are provided in the Appendix.

4

Also see “Developments in the Corporate Bond Market,” in Republic of Korea—Selected Issues, IMF Country Report No. 01/101, July 2001.

5

The inflow of funds to households consists of internal financing or saving (i.e., the portion" of disposable income that is not spent on consumption) and external financing (i.e., funds supplied by financial institutions, such as loans and merchandise credit). Households allocate about 75 percent of this total inflow to financial assets; the rest goes to real assets, chiefly housing. This section focuses on financial wealth. In any case, because the National Statistics Office estimates stocks of real assets only every 10 years, such data are not included with the FOF on the BOK website.

6

In other OECD economies surveyed in Mylonas et al (2000), net worth is about 200–300 percent of disposable income.

7

A related study of the Korean stock market can be found in “Linkages Between Domestic and International Asset Markets: The Korean Case,” in this volume.

8

Another perspective, using more recent microlevel data, is provided in “Firm-Level Analysis of the Korean Corporate Sector During 1996–2000,” in this volume; and in “Health of the Corporate Sector in Korea,” Republic of Korea—Selected Issues, IMF Country Report No. 01/101, July 2001.

9

Because households’ allocation decisions have not changed much each year, the discussion in that section focused on data on stocks of financial instruments. In the case of businesses, however, it is more instructive to use data on flows. In the FOF, the sources of financing for businesses are: internal financing (the sum of nonfinancial corporations’ disposable income, depreciation—which is not a cash outlay and is therefore also disposable—and some capital transfers) and external financing (loans, bond issuances, foreign direct investment, etc.). Businesses then use these funds to purchase real assets and financial assets. As with households, data on stocks of real assets (e.g., factories and offices) are not provided in the FOF.

10

The rise and fall of the ITCs is described in Chapter VI of Republic of Korea—Economic and Policy Developments, IMF Country Report No. 00/11, February 2000.

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