Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond January, 2009

I.Economic Policy Direction in 2009 II.Measures Taken Against the Global Financial and Economic Crisis III.Strong Pillars Supporting the Economy IV.Current Issues & Answers V.Restructuring for a Big Take-Off Beyond the Crisis

3 Year 2009 Economic Outlook 1Q2Q3Q4Q GDP Growth Employment Domestic Consumption Investment

4 Economic Policy Direction in 2009 Amid an unprecedented crisis, the world has been facing ‘Survival Game’ Amid an unprecedented crisis, the world has been facing ‘Survival Game’ and ‘Historic Power Shift’ and ‘Historic Power Shift’ First Stage Third Stage Second Stage “Survival”“Take-off”“Turnaround” Overcoming the Crisis New Growth Preparing For the Future Liquidity Provision Liquidity Provision Timely Fiscal Expansion Timely Fiscal Expansion Job Creation Job Creation Social Safety Nets Social Safety Nets R&D Investment R&D Investment New Growth Engine New Growth Engine Eco-Friendly industries Eco-Friendly industries Globalization Globalization Restructuring Restructuring Human Resources Human Resources Green New Deal Green New Deal Public Sector Sliming Public Sector Sliming External Environment

I.Economic Policy Direction in 2009 II.Measures Taken Against the Global Financial and Economic Crisis III.Strong Pillars Supporting the Economy IV.Current Issues and Answers V.Restructuring for a Big Take-Off Beyond the Crisis

II.Measures Taken Against the Global Financial & Economic Crisis 1. Fiscal Stimulus Package 2. Securing FX Liquidity 3. Financial Market Stabilization 4. Job Creation / Sharing / Training 5. SME’s Liquidity Support 6. Construction Sector Support

7 II. Measures Taken Against the Global Financial and Economic Crisis 1. Fiscal Stimulus Package Tax cut and fiscal expansion will boost domestic economy Fiscal Stimulus Packages Action Amount (GDP ratio, %) Korea ㆍ Tax cut of KRW35.3trn ㆍ Fiscal expansion of KRW16trn KRW51.3trn (5.8) US ㆍ Tax cut of USD317bn ㆍ Obama’s SOC spending plan USD 0.5~1 trn(3.5~7) Japan ㆍ The first stage in Aug ㆍ The second stage in Oct ㆍ The third stage in Dec JPY17trn (3.3) China ㆍ VAT refund rate increase ㆍ SOC investment RMB4trn (16) Tax Cut KRW35.3trn Public Spending KRW16.0trn Total KRW51.3trn Government Debt Level Lower than OECD Peers 2008(E) General Government Gross Financial Liabilities to GDP(%) Source: OECD Economic Outlook, Nov 2008 OECD average : 79.7%

8 II. Measures Taken Against the Global Financial and Economic Crisis 2. Securing FX Liquidity Provide sufficient FX liquidity and keep FX reserve at a sound level 6th Largest Reserves Globally Adequate Amount of Foreign Reserves FX Reserve Ranking ($bn) Liquidity Provision Direct FX Liquidity Provision : USD55bn Government Guarantee Borrowings of banks up to USD100bn FX Swap Line Total USD90bn with US, China and Japan Foreign Exchange Stabilization Fund Increased to KRW20.6trn from KRW10trn Increased to USD201.2bn as of Dec 08 Source: IMF, as of Nov 08 (Sep for China) Korea’s FX Reserves Trend ($bn) Diverse FX Liquidity Provision Measures Will Stabilize FX Market

9 II. Measures Taken Against the Global Financial and Economic Crisis 3. Financial Market Stabilization I Liquidity provision to stabilize domestic capital markets Interest Rate Cuts Korea Policy Rate Trend (%) ActionAmount ㆍ Open Market Operation KRW15.2trn ㆍ Increase BOK’s Ceiling on Loans to Bank KRW2.5trn ㆍ Interest Payment on Reserve Requirement, etc. KRW1.8trn TotalKRW19.5trn Δ2.75% since Oct % 2.50% Liquidity Provision Into Money Market

10 II. Measures Taken Against the Global Financial and Economic Crisis 3. Financial Market Stabilization II Stabilization fund will provide liquidity to financial markets Debt Market Stock Market Investors KDBBanksInsurersSecurities Bond Market Stabilization Fund KRW10trn Corporate Bond SME P-CBO PF-ABCP Credit Card Companies’ Debenture Target Market KRW2trnKRW6trnKRW1.5trnKRW0.5trn Supporting Capital MarketsBond Market Stabilization Fund Market stabilization by operating Stock Market Stabilization Fund (KRW0.5trn) Providing tax incentives for long-term holdings of funds to strengthen stability of the stock market and asset management companies

11 II. Measures Taken Against the Global Financial and Economic Crisis 3. Financial Market Stabilization III Stimulating self-financing and Bank Recapitalization Fund will increase banks’ loan capacity Bank Recapitalization Fund BOK Institutional Investors KDB KRW10trnKRW8trnKRW2trn Bank Recapitalization Fund KRW20trn Banks The Fund is expected to improve BIS ratio by 2.6% Commercial Banks Banks’ Balance Sheet Risk Weighted Assets : KRW771trn Liabilities Mortgage KRW7trn NPL KRW3trn Equity : KRW82trn Securitizing by KHFC Purchasing by KAMCO Improving Banks’ Soundness to Increase Loan Capacity Capital Injection by Bank Recapitalization Fund (KRW20trn)

12 II. Measures Taken Against the Global Financial and Economic Crisis 4. Job Creation / Sharing / Training SOC investment, internship and support for job creating companies will create new jobs Green Growth for Green Job Job Opportunities for Young People Green New Deal :Eco-friendly SOC investment spending KRW50trn and creating 960,000 jobs over next 4 years Job CreationEconomic Growth Engine Infrastructure Technology Life Environment 4 biggest rivers redevelopment Eco-friendly transit system SOC for forming economic zone Alternative water resources Low-carbon, high efficient technologies IT ㆍ SW investment Biomass Eco-friendly buildings Job Creation in the Social Service Sector 126,000 Social Service Jobs to be Offered in 2009 Budget (KRWbn) Number of Jobs Ministry of Strategy and Finance 7211,240 Ministry of Labor19015,673 Ministry for Health, Welfare and Family Affairs 48860,457 Korea Forest Service37226,240 Others11412,317 Total1,236125,927 Encouraging Corporation to Create More Jobs Direct Liquidity Provision Providing KRW10trn through KDB to companies creating mass jobs Internship for Young People 23,000 in public sector 25,000 in SMEs Global Leadership Program 13,000 for future growth engine 19,000 for global leadership

13 II. Measures Taken Against the Global Financial and Economic Crisis 5. SMEs Liquidity Support Expanding additional liquidity support of KRW50trn will ease credit squeeze for SME’s SMEs Liquidity Support Fast-Track Solutions for SMEs Sound SME’s A B C D Possible Bankruptcy? Recoverable? A B C D Sound : SME Support YES NO YES Potentially Risky : SME Support Risky but Recoverable : Workout Irrecoverable : Liquidation Shorten the assessment process from 3 months to 15 days for timely liquidity provision State-Owned Banks Increasing Loan Capacity by Capital Injection Credit Guarantee Fund KDB IBK KRW54trn KRW68trn Expanding Credit Guarantee Support +14trn KODIT KIBO KRW13.5trn KRW25.2trn +12trn + Bank Recapitalization Fund (KRW20trn)

14 II. Measures Taken Against the Global Financial and Economic Crisis 6. Construction Sector Support Liquidity provision for constructors and various support measures will stabilize construction sector Liquidity Provision for Constructors Boost Real Estate Market Deregulation Stimulating real estate market by deregulation regarding reconstruction and real estate transaction Buy Unsold Houses Unsold houses are being purchased by Government and private sector Lower Mortgage Interest Rate Encouraging mortgage interest rate’s decrease by capital injection to KHFC Constructors A B C D Supported by Creditor Banks Debt Rescheduling by Creditor Banks Workout Liquidation Fast Track All Small/ Medium Financial Support & Restructuring Led by Creditors Sound Potentially Risky Risky but Recoverable Irrecoverable

I.Economic Policy Direction in 2009 II.Measures Taken Against the Global Financial and Economic Crisis III.Strong Pillars Supporting the Economy IV.Current Issues and Answers V.Restructuring for a Big Take-Off Beyond the Crisis

III.Strong Pillars Supporting the Economy 1. Sustainable Surplus of the Current Account 2. Consecutive Fiscal Surplus 3. Financial Strength of the Corporate Sector 4. World-class Industrial Competitiveness

17 III. Strong Pillars Supporting the Economy 1. Sustainable Surplus of the Current Account The current account balance is to show surplus in 2009 despite sluggish exports Current Account Balance Oil Price Decrease Source: Bank of Korea Source: Bloomberg Current Account Surplus Expected in 2009 External Conditions Current Account BalanceAmount A2008(E)(USD5.0bn) B Extra Cost from Oil Price Increase 1) USD17.9bn A-B2008(E) AdjustedUSD12.9bn 2009(E) 2) USD10.0bn 2008 Oil ImportUSD85.8bn Oil Import(USD60.3bn) Total IncreaseUSD25.5bn x70% (Domestic Use) Net IncreaseUSD17.9bn 1) Increase of Oil Import 2) Assumed Average Oil Price of USD60/ barrel

18 III. Strong Pillars Supporting the Economy 2. Consecutive Fiscal Surplus Korea’s prudent fiscal position enables it to pursue additional fiscal stimulus, if necessary Continuing Fiscal Surplus Consolidated Government Balance (% of GDP) Surplus Well Above Among Its Credit Ratings Peers Government Surplus (% of GDP) Source:Ministry of Strategy and FinanceSource:S&P Sovereign Risk Indicator, Jul 2008, 2008 forecast data

19 III. Strong Pillars Supporting the Economy 3. Financial Strength of the Corporate Sector Corporate sector is financially strong and sound Dramatically Decreasing Debt/Equity Ratio Debt to Equity Ratio Trend Consistently High Operating Income to Sales Operating Income/Sales Source: Band of Korea, 1 For manufacturing companies Increasing Quick Asset Quick Assets of Listed Companies

20 III. Strong Pillars Supporting the Economy 4. World-class Industrial Competitiveness Technological & Industrial Powerhouse Robust industrial base and world- renowned manufacturing companies Semi-conductor (DRAM, NAND Flash Memory) production : World’s No. 1 PDP production : World’s No.1 Shipbuilding orders : World’s No. 1 Mobile phone production : World’s No. 2 Automobile production : World’s No.5 Cutting Edge IT Industry World’s 1st CDMA based DMB service provider (May ’05) World’s 1st in high-speed internet penetration for 4 consecutive years(’02~’05) World’s 3rd in number of internet users (IMD World Competitiveness Yearbook 2005) World’s 3rd IT competitive country (Economist Intelligence Unit 2007) Global Innovation Index Ranking Country’07~’08’08~’09 Korea196 ↑ 13 Japan49 ↓ 5 China2937 ↓ 8 Source: INSEAD, Jan. 6, 2009

I.Economic Policy Direction in 2009 II.Measures Taken Against Global Financial and Economic Crisis III.Strong Pillars Supporting the Economy IV.Current Issues and Answers V.Restructuring for a Big Take-Off Beyond the Crisis

IV.Current Issues and Answers 1. Household Debt Risk 2. Korean Banks’ FX Position 3. Soundness of Korean Banks’ Loan 4. Better Positioned in Shipbuilding Industry

23 IV. Current Issues and Answers 1. Household Debt Risk Household debt is low-risk and new measures will help improve households’ financial status Relatively low Financial Debt/GDP Ratio Delinquency Ratio of Mortgage Loans Mortgage Loans in Korea are Safe Due to Low LTV Level * UK as of Dec 2007, others as of Jun 2008 Financial Debt/GDP Ratio (%) Delinquency ratio (%) Household Financial Assets is 2 times larger than Debt KoreaUSHKGermanyJapan Mortgage/ GDP 33.4%72.3%37.3%52.4%36.2% Regulation System DirectIndirectDirectMixedIndirect LTV Limit40~60%None60~70%60%Indirect * Korea LTV ratio 47% on Sep 2008

24 IV. Current Issues and Answers 2. Korean Banks’ FX Position Korean banks have no currency mismatch problem Operation Amount (USDBil) FinancingAmount Forward exchange purchased 65.7External debt127.4 Loans45.5 Residential deposits in foreign currency 19.3 Trade bill discount operation 50.5 Swap with foreign bank branches 23.0 Others (Securities, deposits, etc.) 40.0 Swap with bond investors (foreigners) Foreign currency financing/operation - Korean banks Jun 2008Dec 2008(E) Operation Amount (USDBil) FinancingAmount Forward exchange purchased 54.3External debt99.9 Loans47.7 Residential deposits in foreign currency 24.8 Trade bill discount operation 39.6 Swap with foreign bank branches 15.9 Others (Securities, deposits, etc.) 8.7 Swap with bond investors (foreigners) 11.0 Government’s supply* (Swap, Loan) *Assumed that all the Government’s supply has been provided to domestic banks. (Some might be provided to foreign banks branches.)

25 IV. Current Issues and Answers 3. Soundness of Korean Banks’ Loans Korean banking sector is sound and has sufficient room to withstand risks Moderating Loan Growth Low Delinquency Ratio Moderate Loan-to-Deposit Ratio Sufficient Room to Withstand Further Default Risk Loan Growth (%) Delinquency Ratio (%) Loan-to-Deposit Ratio (%) * US : 112% (Including CD, as of July 2008) Sufficient buffer to absorb the impact of further default risk ① Coverage ratio is approximately 175.1% (Sep.2008) ② NPL → 0.8% (Sep.2008) / LTV 47% (Sep.2008) Stringent risk management systems implemented after Asian Financial Crisis Well-diversified lending exposure to various sectors - Manufacturing 35.2%, Real Estate 17.1% Private Sector 14.3%, Construction 9.7%

26 IV. Current Issues and Answers Proportion of Bulk Carrier for Top 7 Shipbuilders 90% 10% 4. Better Positioned in Shipbuilding Industry Korean shipbuilding companies are well-positioned to withstand the recent deterioration in the global shipbuilding market Share of Top 7 Companies Market Share among Domestic Shipbuilders Market Share among Domestic Shipbuilders Increase in Global Market Share in 2008 Amount (100mil)Proportion Market Share (%) 85% 15% 85% 10% 90%

I.Economic Policy Direction in 2009 II.Measures Taken Against the Global Financial and Economic Crisis III.Strong Pillars Supporting the Economy IV.Current Issues and Answers V.Restructuring for a Big Take-Off Beyond the Crisis

28 Early Signs of Turnaround 1Sufficient Fiscal Stimulus Package 2Preemptive Liquidity Provision 3 Enhancing Soundness of Financial Institutions 4 Boosting Domestic Consumption by Job Creation 5 Supporting Construction and SME’s Sector 6Facilitating Corporate Restructuring Korean Government’s Measures Increasing Foreigners’ Net Buying of KOSPI Decreasing Korea CDS Spread Market reacted favorably to the Korean government’s decisive measures

29 Restructuring for a Big Take-off beyond the Crisis Korean government learned its lesson from the 1997 crisis: immediate and efficient restructuring should be executed to provide intensive support to healthy firms and increase competitiveness of Korean economy Creditor Banks Will Execute Restructuring Plan Through Mediation Committee Temporary Liquidity Squeeze Signs of Insolvency The Irrecoverable Financial Support Restructuring Liquidation Mediation Committee for Credit Financial Institutions Corporate Restructuring Coordination Committee Financial Services Commission (coordination, policy response) Creditors Financial Support & Restructuring Led by Creditors The Korea Economy is Fully Prepared to Move Further and Higher Than Its Peers Corporate Restructuring Coordination

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