The economic recovery has greatly improved corporate cash flows, facilitating improvements in bank and corporate balance sheets. This strong recovery has resulted partly because of strong government policies to advance financial and corporate restructuring, partly due to expansionary domestic fiscal and monetary policy and partly because of a good external environment, especially the strengthening of the Japanese yen and the global recovery in the electronics sector. The crisis has opened the door for many fundamental reforms in South Korea. Bank supervision has been improved and stronger regulations for corporate governance are being implemented. The bank restructuring process has been strongly government led, while corporate restructuring has been largely creditor led with the banks in charge of the credit committees for restructuring.
Key problems remain, however.
Restructuring of non-bank financial institutions also need to be significantly tightened. Large amounts of NPLs need to be disposed of. South Korean firms need to significantly increase equity levels and thus reduce debt-equity ratios. The critical challenge for South Korea is to continue the push for critical bank and corporate restructuring and more broadly difficult institutional changes as the economy rebounds to a sustained growth path. In Indonesia, with the rapidly changing political situation, the long history of lack of transparency and the pervasiveness and complexity of the corporate debt and banking crises, progress on banking and corporate restructuring has been slower than in some other East Asian countries.