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A Record of Achievement

Faced with a foreign currency crisis in November 1997, the Korean government requested immediate assistance from the International Monetary Fund (IMF). The IMF responded with a three-year standby assistance program coupled to financial and corporate reform that expired Dec. 3rd 2000. David T. Coe, Senior Resident Representative for the IMF in Korea reflects below on the achievements of the program and the current outlook for the Korean economy

How much did Korea borrow from the standby provision and how much has been repaid?

The standby amount provided by the IMF amounted to a total of $21 billion. In addition, $10 billion was provided by the World Bank, $4 billion by the Asian Development Bank (ADB), and a "so-called" second line of defense, altogether amounting to $58 billion. Korea drew $7 billion of the amount provided by the World Bank and $3.5 billion provided by the ADB. Both sums are still outstanding.

Of the $21 billion provided by the IMF, Korea borrowed $20 billion in total. It has not drawn on the standby provision since the summer of 1999 and so far has repaid $14 billion. That $14 billion was borrowed at a high interest rate under a "special facility," part of the Supplemental Reserve Facility (SRF) created in December 1997 at the onset of the Asian crisis to provide short-term financing to Fund members faced with a sudden and disruptive loss of market confidence. Korea was the first country to use the SRF. The $14 billion was repaid early and the $6 billion outstanding doesn't have to be repaid until 2004. However, the government could repay it early, and the Fund is anxious that it does because with Korean reserves of $96 billion, we need it more than the government does.

The Fund will maintain a presence in Seoul even though the program has ended. Why is this so?

The reason was that the government values our advice and it makes discussions easier if we have an office here.

What would you say are the major achievements of the program?

One of the obvious achievements is helping government to form structures to overcome the crisis through the financial support we mentioned earlier. The Korean economy is now more open to international trade and influence and much more market-oriented than before the crisis. There have been significant achievements in the corporate and financial sectors and the labor market as well.

The Korea Asset Management Corporation (KAMCO) was established to buy up bad bank loans and re-sell them. The Financial Supervisory Commission (FSC), with its executive arm the Financial Supervisory Service (FSS), was launched as an independent supervisory agency and we think the status of the financial sector has improved substantially as a result.

We think KAMCO has done a good job in helping banks deemed viable by the FSC to dispose of their non-performing loans. At the beginning of the crisis there were quite a large number of weak, non-viable financial institutions - almost 500 - that have since been closed. Many were small, like credit unions, but they also included six commercial and 14 merchant banks.

The government has taken steps  to create clean banks through the injection of funds and has performed well in cleaning up bank balance sheets. The banks themselves have adopted forward-looking criteria in their lending practices, improved their risk assessment capability and have gained a much more realistic view of the quality of their portfolios. They have also made provision against non-performing or impaired loans, which we see as a major achievement in the financial sector.

In the corporate sector there is absolutely no doubt that Korean  corporates are very highly indebted compared to those in other counties. Many are unable to service debt out of their operating profits, but we should not lose sight of the fact that debt/equity ratios have fallen. Also, we would agree there has been substantial progress in improving what could be called the economic infrastructure. I'm referring to better accounting standards, an unwinding of cross-guarantees between chaebol affiliates, the appointment of outside directors, enhancing the status of minority shareholders and an improvement in the bankruptcy process.

In the labor market there has been an increase of flexibility due to the formation early in the program of the Tripartite Commission [between unions, government and business] that agreed to layoffs for economic reasons.

I should add that macroeconomic policy has been very well handled over the last three years. With the enormous currency depreciation at the height of the crisis there was always the chance of a wage/price spiral becoming embedded in the economy. That didn't happen in Korea. Inflation has in fact, been very low.

In terms of fiscal policy, when  the severity of the crisis became  apparent, fiscal policy was relaxed. Since the recovery took hold, there has been a removal of fiscal stimuli, which was exactly what was needed given the strength of the upturn. For example, the original estimate of the budget deficit for 2000 was about 3.4 percent of GDP. In fact, from the first to the third quarters, January to September, the economy looks set to produce a surplus of 3 percent of GDP. Fiscal policy is in a good position to respond if the economy weakens.

How do you rate the progress of restructuring in the economy and  its impact on the overall economic  picture?

One of the points noted by the last Fund mission in November was the contrast between very strong developments in the real economy and  a recent decline in confidence. We'd argue that this decline, at least  the part specific to Korea, largely reflects political considerations, for example, the opposition's boycott of the National Assembly and the  perception that the corporate reform program has petered out. The economy has been punished by the market because of this perception. Markets got a wake-up call when Ford pulled out of talks to buy Daewoo Motors. Also, none of Daewoo's 12 affiliates have been sold despite the fact it has been well over a year since the chaebol collapsed.

However, it's important to remember that the weakness of the short-term economic outlook applies  not only to Korea. For example,  the decline on the world's stock exchanges reflects a global reassessment of technology stocks, the rise of oil prices and whether the slowdown in the American economy will be a soft or hard landing.

For the future, we see the banks pushing an agenda of reform rather than the government. Ultimately it's up to the banks to impose discipline on their customers, checking if  their balance sheets are sufficiently strong, tightening their lending  practices and doing a better job of risk assessment. There is evidence they are doing just that, being much stricter with their borrowers. The banks refused to rollover loans to the insolvent Woobang Construction, Dong-Ah Construction, Hyundai Engineering and Construction and the now bankrupt Daewoo Motor. When Seoul Bank refused to rollover loans to Woobang, it was the first time that I'm aware of that a bank refused to rollover loans to a company in a workout program.

Implementing structural policy  is always difficult and always  takes time. Trying to change the way people do business is not easy in  any country. Structural reform is not done yet, but I'd argue that the glass is half-full and in the process of getting fuller, rather than half-empty.

Do you foresee a second economic crisis?

We must be clear what we mean about a second crisis. If we mean a balance of payments crisis of the kind that happened in December 1997, I believe the answer is that the probability is very low. Remember that Korea has changed a lot. There is now a floating exchange rate, which there is no need to defend. Reserves are higher and external debt is much lower. We don't have the same type of problems. This doesn't mean the business cycle is dead in Korea and we do see  indications that consumption is declining. So, in the short term  the economy is much weaker. That's indisputable. However, if  you look at the forecasts by private sector economists, economic growth is projected at 5.75 percent this  year. There have been revisions downward to Korean growth and there could be further revisions,  but 5.75 percent is what most would consider a sustainable level of growth. It's a sharp decline from 2000's anticipated 9 percent, and 1999's 11 percent, but the three years from 1997 to 1999 were clearly unusual.

Suppose the banks do push the corporates so those not viable  will be denied access to credit. Certainly in the short term there  will be an inevitable increase in unemployment. The estimates I've seen, though, don't project an  enormous rise in unemployment, perhaps from 4 percent to 5 percent. Everyone expects weakness to be concentrated in the fourth quarter of 2000 or the first quarter or first half of 2001. The appropriate government response is to ensure the social safety net is strengthened. Given the country's strong fiscal position it may be appropriate to expand fiscal policy and perhaps bring forward expenditures.

Updated January  3rd 2001, By Charles Duerden ( cad@kotra.or.kr )