Transcript Korea`s Development and Financial Policies

Korea’s 1970’s Economic Take-Off
The Contribution of American Banks
Data in this summary is derived mainly from Bank of Korea reports from the period and U. S. Federal Reserve data and other sources. Due to
rounding and possibly different data definitions, the numbers may be slightly out of reconcilement
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Supporting Development:
Korean International Finance, 1970-2000
By the early 1970's, Korea was going into high gear with its export-led “East Asian” development strategy when it was
hit by the First Oil Shock (“Yom Kippur War”). It had to turn to its bankers, especially the Americans, to “borrow its
way through,” which it did successfully based on a policy of working positively with its bankers, both those with Seoul
branches and those working from global money centers. Exports and capital flows grew, especially in connection with
Middle East construction activities and as a result of bold heavy industrial projects financed in part through Japanese
reparations.
The Second (“Iranian Revolution”) Oil Shock hit in 1979 at the same time as political turmoil at home, but Korea was
able to repeat its financing approach of the mid 70's, to “borrow through,” whilst it continued to increase exports and
to rebuild its financial position.
The economy continued strongly into the late 1990’s when, against the background of the Asian Financial Crisis, and
due to weak domestic and international financial management, it again had to turn to its bankers, now from around
the world, for a very large refinancing loan, which it quickly paid off.
The panel will focus on the first Oil Shock where Korea developed the approach that saw it through to the end of the
century. This was essentially to develop and maintain strong relationships with its bankers, who had seen that the
country would take the necessary measures during crises. Indeed, some of the same people, notably Kim Yong Whan,
Finance Minister in 1974, and Chung In-Yong, originally a Finance Ministry civil servant and subsequently a senior
minister, were involved in all three crises, using the same tactics and with the same, positive results.
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Korea’s “East Asian” Development and Financial Policies
Political Background
• Extreme North Korean hostility
• Probable North Korean economic and military superiority in 1970,
offset by U. S. alliance
• Domestic political turmoil, shift to democracy
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Development Themes
Education
Agricultural Reform and Development
Export Manufacturing
Tight dirigiste (directive) financial controls
Strong political, administrative leadership
Popular determination to succeed
High risk approach
Financial Policies
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Bank centered
High corporate leverage, “socialization” of risk
Tight KRW Liquidity
High interest rates for savers, borrower subsidies
Aggressive although controlled foreign
borrowing. Prefer debt to equity flows
• Ties to international institutions
• Cautious opening but increasingly positive
cooperation with foreign banks
• Tight fiscal policy
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Trigger for Extraordinary Action – 1973 Oil Shock
• Korea imported virtually all of its
energy, almost all petroleum
• Rise in import costs in context of
global slowdown weakening exports
• But the Shock put purchasing power
into countries that needed Korea's
construction and infrastructure
services
• Korea’s policy strategy
• Push all exports
• Domestic tightening including
lowering building temperatures
• “Borrow its way through”
and consequent changes in
relations with foreign banks
A thorough analysis of Korea’s debt and
economic policies is available at
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www.papers.nber.org/books/sach89-2
A Key Event – U. S. Institutions Float Bank of Korea Loan
FarEastern Economic Review made
light of the syndication which,
however,
was
serious
and
cooperative.
• Purpose – to raise cash, but equally to
build relationships/image
• Requirement: Openness with lenders
Solution: Change of “Mandarin” attitudes
• Appointment of Chung In Yong as director
of International Finance Bureau, who
“changed the game.” Employing a strong
and creative cooperative relationship
with banks that served Korea well over
the years.
• Citi-led syndication, which was difficult
• Leaders were resident/incoming branch
banks
• U. S. Banks took 80%+ of the exposure
Chung In-Yong
Director, Int’l Finance Bureau, 1974-79,
Later Minister of Finance, Deputy Prime
Minister
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“Cross-Border Risk “ and Term Lending – A 1970’s Banking Issue
Cross Border Risk, also termed Sovereign Risk, Country Risk and other similar names is the risk that a borrower in one jurisdiction – a country in this case – will
either be unable or unwilling to repay a lender based in another country generally in a currency foreign to the borrower’s country. This “transfer risk” is above
normal credit risk. In recent years, the term has deepened with the participation of credit rating agencies and other independent sources of analysis. Limits for
cross-border exposure were generally expressed as a total Dollar (or Lender home currency) amount with a sublimit for exposures maturing after one year. Today
limits structures are likely much more complicated.
Between the 1920’s and 1970’s, commercial banks made comparatively few “cross-border loans,” which were mainly for the financing of international trade.
Following on the growth of the Eurodollar market and the first Oil Crisis which generated large Eurodollar deposits from the oil producing countries, and in keeping
with a post WWII growth of medium term commercial lending, banks in the 70’s and early 80’s did turn to extending cross-border term loans to governments and
other borrowers first in the developed and then in the developing world which needed to finance higher cost energy inputs.
Evaluating Korean Cross Border Risk in 1975
Reasons to Proceed
• U. S. political and military backing
Risk Issues
• Positive impression of Koreans
• North Korea
• Good domestic management
• Domestic political concerns
• Tough policy making
• Higher oil prices
• Satisfactory experience
• Uncertainties about world
• Relatively low existing exposure, mainly short-term
economy and exports
• Acceptable returns for comparatively low risk credit
• Aggressive development
structure-oriented to trade, MNC borrowers and Ex=Im
far from assured
• Personal knowledge
Second Oil Shock was larger in scope, but easier to manage due to excellent experience during 1970’s
How and Why the BOK Loan Was Structured as It Was
The Loan
The Players
Bank of Korea, the central bank, was the legal
borrower. Lenders like central banks because they
own the foreign currency reserves, but in this
case the reason was that some participants were
up to the “Legal Lending Limits” of 10% of capital
with Korea Exchange Bank, Korea's more usual
international borrower.
Citicorp International was First National City
Bank's (FNCB’s) merchant bank, and got top billing
as the loan's organizer,
Lead managers, as well as FNCB, committed
to lend either $25 million or $20 million.
Some used their own merchant banks in the
“lead” group
Korea Exchange Bank (KEB), was included to
respect its customary role as representative of
Korea in international markets
Amount and terms as requested by Korea. Loan
was to be repaid in equal semiannual
installments beginning at Year Three, although
Korea had borrowed for up to ten years,
amount/maturity were challenging.
The loan was actually extended by the banks
themselves, not their merchant bank affiliates,
although in some cases the affiliates also
participated. Participants are show in rank and then
alpha order for different tiers of participation
Legal support came from the Government's
declaration that BOK and KEB were supported by
the “full faith and credit” of the ROK, based on
laws requiring the National Assembly to cover
any deficits in the equity of the banks.
Asia-Pacific Capital Corporation, a joint venture
Of FNCB and The Fuji Bank, was also involved in
Organizing the loan, as was, of course, FNCB.
Seoul Branch
The $200 million principal amount would be equivalent to
more than $1 billion in today's U. S. Dollars. Refinancing in
1998 required $24 billion. But $200 million was a lot in 1974.
U. S. Banks Stepped Up for Second Oil Crisis as Well
Oil
Shock I
Oil
Shock
II
Source: Federal Reserve Board
The banks provided trade finance, both through their Seoul branches and from the U.S., term loans from international markets and company finance through their Seoul branches including both USD and KRW (USD/KRW
swaps with the BOK) as officials stimulated inflows of finance through regulatory change.
Korea’s 1970’s
Economic Take-Off
ax GDP growth
Raises per capita
Income 6+ x
Enormous export
growth pays for imports, supporting
improved lifestyle
Foreign capital flows necessary
to supplement domestic savings.
Reserves grow to support
financial stability
Item
1970
%
1975
GDP – $bn
GDP Per capita $
8
247
-----
21
599
%
1980
%
+163 62 +196
+142 1631 +172
% 70-80
+675
+560
GDP Structure %
Agriculture
Manufacturing
Other
31
18
51
27
22
51
Bal Of Payments
Exports $bn
Imports
Services (met)
Trade Balance
Net Capital Inflow
Overall Balance
0.9
1.9
0,2
-0.8
0.6
0
5.0 +455 17.2
6.6 +247 22.0
-0,5
-1.4
-2.1
-6,2
2.1 +350 3.5
0.4
-2.0
+244 +1788
+1057
+233
Export Structure $b
Food/Raw materials
Chemicals/Refined Oil
Mfg. (Hard goods)
Mft. (Soft Goods)
Total
0.2
0.3
0.4
0.9
0.9
0.2
2.2
1.9
5.2
9
5
55
31
100
Financial Position ($bn)
Int’l Reserves
Foreign Debt ($ bn)
US Bank claims
Domestic Savings Rate
0.6
2.2
0.3
18%
22
33
45
100
1.6
8.4
1.8
20%
18
25
57
17
2
43
38
100
1.5
0.9
9.7
5.4
17.5
6.6
27.2
5.7
24%
-13
+7
+6
+166
+487
Agriculture’s
Share declines,
but grows in
Absolute terms
Capital inflows
pay for equipment
purchases, balancing
payments
Manufacturing drives export
growth, with industrial goods
& electronics taking lead from
“soft” goods
1000
1280
1800
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