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Rehabilitating financial health

Through the restructuring process, corporations and financial institutions improved their financial health significantly. In the corporate sector, latent non-performing assets were estimated at 18.6 trillion won, or 3.4 percent of GDP, at the end of 2001. This ratio was much lower than the level observed before the crisis (over 20 percent), and government intervention was deemed no longer necessary. Debt-to-equity ratios and other financial indicators also improved dramatically. Of particular importance was the disappearance of implicit state guarantees to businesses. Witnessing the demise of Daewoo and other chaebol , businesses hurried to dispose of unprofitable business lines and reduce debts, and became more prudent in their investment decisions. The root of the chaebol problem vanished.

Also notable were the sweeping changes in the financial sector. All weak financial institutions, except large banks, were closed down or merged (Table 2-17). Twenty-nine out of thirty merchant banking corporations, which were directly responsible for the outbreak of the crisis, disappeared. As for other NBFIs, including insurance companies, mutual savings banks, credit unions and lease companies, over half of them discontinued their business. The number of banks also decreased by half, and the financial health of the remaining banks improved markedly; their average capital adequacy ratio rose from 7.0 percent in 1997 to 10.8 percent in 1999, and recorded 12.4 percent in 2005.

The public sector reform was completed mainly as planned. All of the five SOEs slated for immediate privatization were privatized, as were three of the six SOEs scheduled for phased-in privatization. Consequently, the total number of SOEs and their subsidiaries decreased by 64 percent from 98 to 35, and their employment by 62 percent. Across the entire public sector, including central and local governments and their agencies, employment was reduced by 20 percent between 1997 and 2001. Privatization also generated revenues of 24.3 trillion won.

Table 2-17. Changes in the number of financial institutions

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

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