Mr. Chon reports on recent economic trends in Korea and the Bank of Korea's monetary policy response to them  (Central Bank Articles and Speeches, 4 Nov 98)
Central bank: bok | Type: speech | Date: 1998-11-04

## Mr.

Chon

reports

on

recent

economic

trends

in

Korea

and

the

Bank

ofKorea's monetary policy response to them Speech by the Governor of the Bank of Korea, Mr. Chol-Hwan Chon, at a press conference hosted by the Seoul Foreign Correspondents Cl Seoul on 4/11/98.

## I - Introduction…I

am

very

pleased

to

be

with

you

today

to

talk

about

the

recent

econ developments in Korea.Nowadays almost all countries around the world have become closely linked each other in a global information community, owing to the rapid advances telecommunications.

The advisory role and influence that the international press exerc the economic development of any one country have correspondingly increased.

You yourse as

foreign

correspondents

in

Korea

have

shown

keen

interest

and

provided

valuable

a admonition and encouragement in our attempts to defuse the crisis that broke out a yearWe are most grateful.

So, let me take this opportunity to voice my sincere to you all.

And I hope that today's meeting, although all too brief, will help you ga understanding of the Korean economy today and the thrust of monetary policy in the futur

## II - Recent Economic Trends in KoreaReal EconomyFirst, let us look at the recent performance of the Korean economy.As you know, we have been going through serious hardships.

Domestic demand i terms

of

both

consumption

and

investment

has

been

deeply

depressed

by

the

shock

o currency crisis and the effects of structural adjustment.Exports have also been sluggish mainly because of the severely subdued dem in our major markets, including Japan and Southeast Asian countries.GDP growth for the first half of this year was down sharply to -5.3 per against the 4.9 per cent of the latter half of the previous year.

Viewed by quarter, quarter's growth rate slid further to -6.6 per cent from -3.9 per cent in the first statistics for the third quarter have not been compiled yet, but indicators related t consumption and investment remained subdued.Unemployment rose to 7.3 per cent in this September from 3.1 per cent at th of

last

year,

as

the

economic

recession

deepened

and

firms

downsized

in

the

proc restructuring.And the number of unemployed shot up dramatically to 1.6 million in Septemb which was more than three times as many as the half million a year before.Consumer

prices

had

risen

steeply

in

the

period

from

last

December

to February, affected by the massive depreciation of the Korean won.

But they have held steady since this March.

This can be put down to the stable movements of the exchange international raw material prices, along with the depressed domestic demand.Turning to the current account, we have seen a swing from a deficit of 8 dollars in 1997 to a large surplus of some 31 billion dollars for the first three qu year.Much of this improvement, though, must be attributed to the sharp reducti imports, brought about by the subdued domestic demand, which has more than offset the of the decline in exports.

## Foreign Exchange and Financial MarketsNow let us move on to the foreign exchange and financial markets.Helped by the large surplus on the current account and the conversion of m the

outstanding

short-term

foreign

debt

of

financial

institutions

to

long-term

obli foreign exchange market has stabilized substantially.

Usable foreign exchange reserves r billion dollars at the end of this October, which was above the year-end target level o dollars agreed as a conditionality element of the IMF's standby arrangements.Since mid-March, the exchange rate has regained stability, moving in a ran some 1,300 to 1,400 won per US dollar.Total foreign debt, as defined by the IMF standard, has also been reduced billion dollars since the end of last year.

It stood at 151 billion dollars at the end thanks largely to the considerable contraction in the foreign liabilities of the financ sectors.

Moreover,

the

environment

for

the

rollover

of

outstanding

borrowings

by financial institutions has become markedly more favorable in the international financia Fresh foreign borrowings, though, are still not so easy.In step with the improved foreign exchange market conditions, the Bank of K has steadily reduced its market intervention rate from a high of around the 35 per ce December 1997 to its current 7 per cent.

This has brought about a matching decline i interest rates, particularly since it cut its repo rate by 1 per centage point on Sept overnight call rate is running at a level of 7 per cent and the long-term interest ra yields on corporate bonds is at the 10 per cent level, both lower than prior to the ou currency crisis.Turning to money supply, the Bank of Korea has essentially maintained a st monetary policy stance.

But, when necessary, it has been prepared to respond flexibly for instance, to soothe financial market instability that might arise in the course of financial

sector

restructuring.

As

a

result

of

the

authority's

focus

on

stability, September,

reserve

money

reached

22

trillion

won,

which

was

somewhat

below

the

IMF indicative

limit.

And

the

growth

rate

of

M3

has

slowed

smoothly

from

15.9

per

cent December to 14.0 per cent this August.As financial markets have regained stability, the incidence of corporate has declined gradually.

From this March onwards, the per centage of bills and checks dis which had shot up to 1.49 per cent toward the end of last year, has constantly receded. has

been

running

at

around

the

0.3

per

cent

level.

The

monthly

numbers

for

cor insolvencies have shown a sharp decrease, from 151 this January to 42 this September.Having

said

this,

I

must

point

out

that

the

credit

crunch

has

not

yet Financial

institutions

are

very

prudent

in

lending

to

firms,

mainly

because

of

the credit risk of enterprises in the course of structural adjustment.

Their need to mainta BIS

capital

adequacy

ratios

is

also,

in

part,

a

factor.

Accordingly,

most

small

an enterprises, which mainly rely on indirect financing from banks, have been going throug financial difficulties.

## III - Monetary Policy Res ponse

## Expected Economic EnvironmentBefore I explain the thrust of monetary policy in the future, let me first the expected economic environment.

The recession will be prolonged into the fourth quar to the ongoing slackness of private consumption and investment demand, and the subs slowing of export growth.

Although the current account is likely to continue to run during the fourth quarter, its scale will be somewhat reduced.Meanwhile,

consumer

prices

seem

likely

to

continue

the

stable

trend movements they have maintained since this March.In the foreign exchange market, the favorable supply-demand conjuncture wil sustained thanks to the continuing current account surplus and inflows of foreign ca from inward foreign direct investment and the proceeds of overseas disposal of corporat Consequently, the foreign exchange rate should continue to move within a stable range time being.

However, there are potential factors making for exchange rate instability the unrest in emerging markets, such as Russia and Latin American countries.The overall demand for funds in Korean financial markets is unlikely to be given the deep-seated economic recession.

Nevertheless the steady worsening of the cash enterprises will add to the demand for working capital.So far this year, the burden that maintaining the BIS capital adequacy rati on financial institutions' management has been eased through the injection of public the disposal of non-performing loans.

However, no major expansion of their lending is in the near future, due to the persistently high credit risk of enterprises.

## The Thrust of Monetary PolicyAlthough

structural

adjustment

is

never

without

pain,

a

deep

and

prolo depression could erode the country's industrial base and sap Korea's growth potential.Therefore, the emphasis of future monetary policy is being placed on preve further contraction of the real economy and on promoting structural adjustment.First, the Bank of Korea will maintain a policy stance favoring the stab interest rates in order to encourage the recovery of the real sector, insofar as this d with sustaining foreign exchange market stability.

Seen in this context, the recent reduction

of

market

interest

rates

and

banks'

lending

rates

will

contribute

to

re financial expenses of the corporate sector, and to restoring consumer and investment coSo far this year, banks have not reduced their lending rates in keeping w decline in market interest rates.

However, the overall cost of their funds has come dow share of outstanding high-cost deposits declining as well as the rapid reduction in r deposits.Thus there would seem to be greater scope for them to lower their lending raSecond, while maintaining the stable stance required under the agreement wi IMF and this year's inflation target, the Bank of Korea will manage market liquidity in manner, closely watching financial market conditions.

Action might be required, hypoth speaking, should interest rates rise to unacceptably high levels in response to the lar of government bonds, or if there were fears of bottlenecks in the flow of funds, or system instability in the process of structural adjustment.Third, and most importantly, we intend to take such initiatives as may be to solve the credit crunch that continues to bear so heavily on firms in a situation w unable to access funds smoothly, despite the ample liquidity in the financial sector.In this context, we will do all we can to encourage banks to expand their to small and medium enterprises by strengthening incentives.

In this connection, we considering

a

change

of

allocation

standards

for

individual

bank

quotas

under

the

a credit ceiling, to put more emphasis on lending performance to small and medium enterpr

## IV - Concluding RemarksThe

Korean

economy

is

now

placed

in

an

extremely

difficult

situation,

w previous experience and received wisdom provide little guidance.

However, all economic fully realize that in order to tackle the problems which led to the crisis, there is other than swift and intensive structural adjustment.

And we are now resolutely and fitting the blocks carefully together to build a sound new economy.The Bank of Korea will do its utmost to support this structural adjustment maintaining monetary stability.

Of course, to some foreigners, Korea's structural adjus appear inadequate or incomplete in some aspects.But may I ask you as informed commentators on the Korean economy to have confidence in our resolute determination to carry out thoroughgoing structural adjustm counsel and advice in this process will be greatly appreciated.