IMPACT OF THE GLOBAL FINANCIAL CRISI

S
ON KOREAN ECONOMY

GROUP 6
•BOGINIVALU,NANISE ROKOWASA
•DAMHURI, TAUFIK
•KHUDAYAROVA, DILDORA
•MARCAL, AZEVEDO LOURENCO DA COSTA
•MUTINDA, ADELIDE KAMANTHE
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Presentation Outline
 CAUSES
 IMPACTS - FACTS and EVIDENCE
 IMPLICATIONS
 POLICY OPTIONS

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Causes
 US Housing Market
› Boom and bust in the housing market
 Government policies: “homeownership for all”
 Federal Reserve’s Policies of “low interest rate pol
icy”
 High-risk mortgage loans and lending/borrowing
practices
 Lack of Financial Regulation
 The Increased Debt/Capital Ratio of Investment B
anks

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US Housing Market: 

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Clinton Administration
 1994- National Home
ownership Strategy(N
HS) was initiated
 1997- Taxpayer Relief
Act: up to US$250, 0
00 exempted from ca
pital gains tax when y
ou sell house

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Bush Administration
 2003- American Dream
Downpayment Act: pro
vided grants to help firs
t time home buyers wit
h down payment and cl
osing costs

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U.S. Govt’s Housing Policies

 Government policies intended to realize the ideolog
y of political democracy through the expansion of “h
omeownership for all”.
 The most fundamental function of the market is to
discriminate between creditworthy and uncreditwor
thy borrowers, but the government nullified this fun
ction in the name of political ideology
 Distorting market function of allocating houses only
to those who could afford.
 The Federal policy designed to promote more home
ownership among households with incomes below t
he median.
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U.S. Gov’t’s Housing Policies

 The Federal Government imposed a complex set
of regulations and mandates that forced various
lending institutions to extend more loans to low-
and moderate-income households.
 In order to meet these mandates, lending standa
rds had to be reduced.
 By the early years of the 21st century, it was possi
ble to borrow more (relative to your income) and
purchase a house or condo with a lower down p
ayment than was the case a decade earlier.

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 In 2004, inflation started rising, the

US Federal Reserve started to withd
raw monetary accommodation.
 The housing market in the United St
ates suffered greatly as many home
owners who had taken out sub-pri
me loans found they were unable t
o meet their mortgage repayments.
 With a large number of borrowers
defaulting on loans, banks were fac
ed with a situation where the repos
sessed house and land was worth le
ss on today's market than the bank
had loaned out originally.

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Homeowner’s Speculation:
 During 2006, 22% of homes purchased
(1.65 million units) were for investment
purposes, with an additional 14% (1.07
million units) purchased as vacation ho
mes.
 A record level of nearly 40% of homes
purchases were not intended as primary
residences.
 Housing prices nearly doubled between
2000 and 2006, a vastly different trend
from the historical appreciation at roug
hly the rate of inflation

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Global Imbalances:

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FACTS and EVIDENCE

1. EXCHANGE RATE
2. STOCK EXCHANGE
3. ECONOMIC GROWTH
4. DOMESTIC ECONOMIC INDICATOR
5. EMPLOYMENT
6. CONSUMER PRICE INDEX AND INFLATION

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IMPACT OF ECONOMIC GLOB

AL CRISIS
KOREA
RESERVE BANK

• improved policy
USA Subprime • limited exposure to Korea
Mortgage Crisis western banks Strong and
Vulnerable

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SHARP DEPRECIATION OF THE KOR

EAN CURRENCY

Lehman
Brothers
Subprime Collapse
Mortgage
Shock

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SHARP DECLINE IN STOCK EX

CHANGE

Lehman
Brothers
Collapse

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LOWEST LEVEL ECONOMIC GROWTH R

ATE SINCE CURRENCY CRISIS

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GROWTH RATE BY COMPONE

NT OF EXPENDITURE (Unit: percent)
2008 2009
2006 2007
YEAR I II III IV I
GDP 5.2 5.1 2.3 1.2 0.3 -0.1 -4.5 0.2

GNI 3.9 4.8 -0.6 -0.6 -0.4 -2.6 -1.7 -0.7

Final Consumption Expenditure 5.1 5.1 2.0 1.0 0.1 0.3 -3.2 1.3

Private Consumption 4.7 5.1 1.3 1.1 -0.3 0.1 -4.5 0.2

Government Consumption 6.6 5.4 4.3 0.6 1.5 1.0 1.7 5.0

Gross Fixed Capital Formation 3.4 4.2 -1.9 -2.4 0.2 0.0 -6.7 -0.2

Construction 0.5 5.4 -2.8 -4.2 -0.4 0.7 -3.3 4.4

Facilities 8.2 9.3 -1.0 0.4 1.2 -1.0 -13.9 -9.1

Exports of goods and services 11.4 12.6 6.6 1.8 1.5 -0.1 -8.9 -0.8

Import of goods and services 11.3 11.7 4.4 1.1 1.7 0.3 -14.7 -8.2

(Source: BOK)
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EMPLOYMENT CONDITION WO
RSEN, WAGE GROWTH SLOW

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INFLATION GATHER PACE

(Unit: percent)
2008 2009
2006 2007
YEAR I II III IV I
CPI 2.2 2.5 4.7 3.8 4.8 5.5 4.5 3.9

Core Inflation 1.8 2.4 4.2 3.0 3.9 4.8 5.4 4.9

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CURRENT ACCOUNT POSTS FI

RST DEFICIT IN 11 YEARS
 The capital account balance posted a defici
t of 50.9 billion dollars
› September it recorded a deficit of 9.1 billion d
ollars because of the outflow of foreigners’ sto
ck investment funds
› December, the deficit snowballed to 41.8 billio
n dollars

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IMPACT OF ECONOMIC GLOB

AL CRISIS

EXPORT CAPITAL
USA Subprime ORIENTED
Mortgage Crisis FLIGHT
COUNTRY

GLOBAL GLOBAL KOREA

CRISIS DEMAND ECONOMIC
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November 2008 IMF-World Economic Outlo

ok
“Korea would grow 2 percent in 2009”
Less than three months later
the IMF revised its forecast,
“downward to a contraction of GDP by 4 per
cent in 2009”,
which would be the worst performance expe
cted among Asian economies.

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IMPLICATION
 DIFFICULTIES IN MAINTAINING LEVEL OF G
ROWTH.
 UPWARD TREND OF PRICES IS EXPECTED
TO DECELERATE
 CURRENT A/C IS LIKELY TO REGISTER A S
URPLUS AS THE PACE OF THE DECLINE IN
IMPORTS OUTSTRIPS THAT OF EXPORTS
 INACTIVE FINANCIAL INTERMEDIATION IN
THE FINANCIAL MARKETS

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POLICY OPTIONS
Korea’s policymakers acted in a bold fashion to cu
shion the impact of the crisis on the financial syste
m and the broad economy.

Two broad goals:

 safeguarding the financial markets
 reinstating the financial sector as the patron for the real econo
my

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Safeguarding the financial markets:

 To stabilize the foreign currency market, the government

provided external debt guarantees for domestic banks and
signed currency swap arrangements with major countries.

 On the other hand, to bring back stability to the financial

markets, interest rates were cut and the Bond Market
Stabilization Fund was created to increase liquidity and
help restore the flow of credit to the real sector.

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FOREIGN CURENCY LIQUIDITY PROVISION

› 2008-2009 Government and BOK: $55 billion to
POLICY OPTION

provide foreign currency liquidity

› 10/08 Government: 3-year $100 billion payment
guarantee for foreign currency borrowing by dom
estic banks
› During 11-2/2008, Korea also made currency swa
p agreements of $30 billion each with the US, Jap
an and China
› As an additional measure for stabilizing the foreig
n exchange market, the government now grants t
o foreign investors an income tax exemption on in
terest from government bonds

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INTEREST RATE CUT AND LIQUIDITY PROVISION

POLICY OPTION

› To prevent the Lehman Brothers bankruptcy in

September 2008 from resulting in a credit crun
ch, the BOK reduced the policy rate by 325 bas
e points – from 5.25% to 2.0%.
› To assure liquidity the bank also pumped 23.3
trillion won into the banking system through a
Repurchase Agreement (RP) (16.8 trillion won)
and treasury bonds (1.7 trillion won) and the b
uyback of the Monetary Stabilization Fund (0.7
trillion won)

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Reinstating the Financial Sector as the Pa

tron for the Real Economy
The government also moved swiftly and sufficiently to help banks boost their capital and
maintain a steady flow of credit to businesses.

1. Bank Recapitalization Fund and helped eight domestic

banks raise their capital.
2. Corporate Restructuring Fund and Financial Stabilization
Fund
3. Assistance to the SMEs by expanding debt guarantees and
extending loan maturities
4. Task Force to provide assistance to companies experiencing
short-term financial difficulty

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› SUPPORT FOR HOUSE HOLD LOAN/MORTGAGE HOLDER: Me

asures include guaranteeing collateral supplementation up to
100 million won for the depreciated value of housing, extendi
POLICY OPTION

ng the maturity and grace period of mortgage loans up to 10

years, and exempting the early repayment fees on the transfer
from floating to fixed-rate loans
› LARGE SCALE STIMULUS FISCAL: Specifically, the government
has earmarked 51.3 trillion won (5.7% of GDP) for a stimulus
package, which includes investment in infrastructure, provisio
n for the social safety net (16 trillion won), and a reduction in
corporate and personal income tax rates (35.3 trillion won)
› JOB SHARING: In order to create new jobs and retain employ
ment the government will spend 60% of its budget in the first
half of 2009 and launch the Green New Deal Project, which w
ill invest 50 trillion won for the purpose of securing future eco
nomic growth and employment

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Key objectives necessary to ensure continued financia

l market stability:

① To take steps to encourage a virtuous circle of funds between

the financial sector and the real economy.
② To look for ways to increase the speed and enhance the
efficiency of the restructuring process.
③ To look for ways to reinforce the soundness of the financial
services industry: utilize the Bank Recapitalization Fund, the
Corporate Restructuring Fund, the Financial Stabilization
Fund, and other tools available to help reinforce the
soundness of the overall financial sector.

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IMMEDIATE RESULT
 The economy recorded positive growth in
2009
 The current account balance has posted a
positive figure
 The stock market has managed a sustained
rally
 The exchange rate has gained vis-à-vis maj
or currencies

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IMMEDIATE RESULT
This optimistic outlook was further bolstered
by the OECD composite leading indicators(Ju
ne 8 2009) which showed that among its me
mbers the sharpest upturn during the first qu
arter of 2009 took place in Korea

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