International strategic management
South Korea, financial crisis
Melissa MactavieJodie MackayTeboho LentoSifiso MashishiKarushka naidoo
South Korea’s current account balance started to deteriorate in 1990, due to the rising inflation, appreciation of the Korean won and the recession of the world economy. In 1991 the current account recorded a deficit of $8.7 billion, which was more than four times the level of the preceding year. The Korean government encouraged capital inflows in order to finance the growing current account deficit. To achieve this objective, capital account liberalisation was accelerated in 1991by altering the Foreign Exchange Management Act. The limited capital account liberalisation implemented resulted in substantial capital inflows. The large private current account deficits and the maintenance of fixed exchange rate encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors. Policymakers were more worried about the effect that the capital inflows would have on the competitiveness of the Korean exports through the appreciation of the Korean won as the U.S Federal Reserve Bank began to raise U.S interest rates to head off inflation, which made the U.S a more attractive investment destination comparative to Southeast Asia, which had been attracting hot money flows through high short term interest rates and raised the value of the U.S dollar. Hot money flows were accumulated because of higher interest rates in the East. As hot money flows into the East started to decrease, currencies started to fall and the government struggled to keep exchange rates at their fixed level against the U.S dollar. The South Korean won weakened to more than 1,700 per U.S dollar from around 800. South Korea was one of the Southeast Asian nations which had currencies fixed to the U.S dollar, the higher U.S dollar caused their own exports to become more expensive and less competitive in the global markets. Export growth dropped dramatically in 1996, which weakened their current account position. They failed to notice the resulting financial instability in 1993 and the Korean government also announced a blueprint for financial sector liberalisation that deregulated restrictions on asset and liability management of the financial institutions, but the government disregarded the need for ample prudential regulation in this move. This resulted in an increase in the short-term foreign currency debts of financial institutions. In addition, as part of the requirements for joining the OECD in 1996, the government implemented additional financial deregulation and capital market opening, but it chose to liberalise short term capital inflows ahead of long term capital inflows. Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations (ASEAN) economies in 1993-1996, thenshot up beyond 180% during the worst phase of the crisis. In South Korea, the ratios rose from 13% to 21% and then to a high of 40% Many factors compounded to the financial crisis tat hit South Korea. South Korea’s banking sector was weighed down with non-performing loans as its large corporations were funding aggressive expansions. Thirty savings and loans institutions were allowed to borrow from foreign sources, these institutions borrowed recklessly on a short term and loaned to Korean chaebol companies. The top thirty conglomerates debts are four times greater than their equity bases. These top thirty chaebols account for about 14percent of gross domestic product (GDP). Korean conglomerates overbuilt in the areas of auto, steel, petrochemical and semiconductor industries. During this period, there was a haste to build great conglomerates to compete on the world stage. Asset-based business rather than profit-based business characterizes the Korean way of running a company. Asset value appreciation for the last three decades planted wrong...
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