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Overview of Korea’s development experience

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Development Overview
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Structural improvements and selective foreign borrowing, 1986 to 1992

Structural Improvements and Selective Foreign Borrowing, 1986 to 1992

Entering the latter half of the 1980s, the Korean Economy was enjoying the benefits of the “three lows” – low oil prices, low interest rates, and rapid depreciation of the Won against the U.S. dollar. From 1986, double digit GNP growth continued to average 12 percent annually, inflation remained moderate, and the nation continued to record a current account surplus, $14.2 billion in 1988. Responding to international pressures for market openings, Korea continued to liberalize its domestic markets.

Under these circumstances, the previously implemented foreign capital policies had a market effect on improving Korea’s economic structure. At the end of 1985, the “Foreign Bond Issues Regulations” and the “Listed Firms’ Foreign Bond Issues and Supervision Regulations” were introduced, and listed enterprises could issue equity related bonds, such as Convertible Bonds (CB), Bonds with Warrant (BW) and Depository Receipts (DR) in the international market. This contributed substantially to the internationalization of Korea’s financial sector. The government continued to liberalize FDI as well. In 1987, the liberalization ratio in the manufacturing sector increased to 97.5 percent. Virtually all manufacturing, with the inevitable exceptions such as public utilities, were opened to foreign investors. Recently, the service sectors, including financial services, were opened.

At the end of 1992, the Foreign Capital Inducement Law was amended and foreign investment was approved by simply filing a report to the relevant Ministry without prior approval.
A current account surplus was recorded in 1986 and new foreign borrowing was restricted. The issuing of new stocks was encouraged in its place, in order to improve the financial structure and attract new investment. Consequently, total foreign debts were reduced during the current account surplus period (1986~89), while FDI sharply increased. Foreign technology transfer also became significant. Also, the methods of foreign borrowing were diversified.

By using the current account surplus, the government made foreign-currency loan funds available, and these funds were used for the early repayment of unfavorable foreign debts, thus improving the foreign debt structure. These efforts continued until 1990, when a current account deficit was recorded. At that time, the government could borrow foreign capital with favorable terms and conditions because of Korea’s high credit rating.

[Table 1-1] Foreign Borrowing, 1986 to 1992

 (In million dollars, %)              
  1979~85 1986 1987 1988 1989 1990 1991 1992 1986~92
Amount Share Amount Share
Public loans 10,105 28.9 880 1,109 891 475 418 429 486 4,688 15.4
Commercial Loans 7,937 22.7 1,620 1,558 988 860 30 - 150 5,206 17.1
Fin. Institutions’ Loans 14,881 42.6 1,180 777 9 208 1,445 4,450 2,227 10,296 33.9
(Bank Loans) 11,892 34.0 683 777 9 - 420 1,986 443 4,318 14.1
Foreign Bonds 2,989 8.6 497 - - 208 1,025 2,464 1,784 5,978 19.8
Private Foreign Bonds 834 2.4 389 315 110 50 570 1,165 1,916 4,515 14.9
(Equity Related) 20 - 60 30 30 50 290 1,065 636 2,161 -
FDI 1,157 3.4 477 626 894 812 895 1,177 803 5,684 18.7
TOTAL 34,919 100.0 4,546 4,385 2,892 2,405 3,358 7,221 5,582 30,389 100.0

Note: Including FRCD
Sources: MOF, EPB, BOK
 
During this period, financial institutions’ foreign borrowing through bank loans and foreign bond issues amounted to $10 billion, 339 percent of the total foreign debt.

In line with the trends of securitization, new foreign bond issues were developed and market ‘know-how’ improved. Under these circumstances, financial institutions foreign bond issues increased sharply to $5.9 billion, while foreign borrowing through bank loans was significantly reduced.

FDI increased fivefold to $5.6 billion, with the help of the government’s liberalization policy and Korea’s improved investment environment. With domestic firms’ high credibility, they issued foreign bonds totaling $4.5 billion. From the end of the 1980s, equity related bond issuances increased dramatically.

Huge public loans had been introduced in the early 1980s to compensate for the current account deficit and to restructure Korea’s imbalances. However, during this period, 1986 to 1992, public loans amounted to only $4.6 billion or 15.4 percent of the total foreign debt.

Commercial loans decreased to $5.2 billion, as domestic firms continued to favor issuing foreign bonds and obtaining government provided foreign-currency loans.

As to source, foreign borrowing from Japan, the U.K. and Hong Kong increased, while U.S-sourced borrowing decreased. Also, during this same period, there were limitations put on foreign-funded projects in order to further restrict foreign loans.

Public loans were used mostly for environmental, education and social development, while commercial loans went to projects or development in the electric and electronic, automobile and iron industries, as well as for the early repayment of high-interest and short0term commercial loans. Bank loans and foreign bond issues were also used for early repayment, but later they were used for equipment investment. Private foreign bonds were issued for overseas investment projects and equipment imports. Huge amounts of FDI were made in such industries as electric and electronics, transportation equipment, chemicals, hotels, finance and insurance.

Early repayments of foreign loans were intensively accelerated and total repayments reached $46.5 billion during this period. With the increase in early repayments, the total foreign debt was sharply reduced to $29.4 billion by 1989. As well, due to the current account surplus and foreign asset increases, net foreign debt was dramatically reduced to $3 billion in 1989. The foreign debt ratio to GNP continued below 15 percent until the early 1990s. The DSR decreased to 4.6 percent in 1991, due to the huge early repayment of unfavorable loans in 1987.

[Table 1-2] Foreign Debt and Repayment, 1986 to 1992

 (in billion dollars, %)                
  1979~85 1986 1987 1988 1989 1990 1991 1992 1986~92
Amount Share Amount Share
Repayments 25.8 100.0 7.3 14.9 8.0 5.7 4.2 3.1 3.3 46.5 100.0
Public Loans
Commercial Loans
Bank Loans
Foreign Bonds (1)
6.9
 
11.9
6.4
 
0.6
26.6
 
46.4
24.7
 
2.2
1.8
 
2.1
2.8
 
0.6
3.3
 
3.1
7.6
 
0.9
2.6
 
2.5
1.7
 
1.2
1.9
 
2.0
1.2
 
0.6
1.5
 
0.8
0.4
 
1.5
1.6
 
0.8
0.2
 
0.5
1.6
 
0.9
0.3
 
0.5
14.4
 
12.3
14.2
 
5.6
30.9
 
26.4
30.6
 
12.2
DSR
Foreign Debt/GNP
Total Foreign Debt
Net Foreign Debt
-
 
-
 
-
-
-
 
-
 
-
-
20.8
 
43.3
 
44.5
 
32.5
30.1
 
27.6
 
35.6
 
22.4
13.2
 
18.4
 
31.2
 
7.3
9.8
 
14.4
 
29.4
 
3.0
8.0
 
13.1
 
31.7
 
4.9
4.6
 
13.9
 
39.1
 
12.0
5.0
 
14.5
 
42.7
 
11.0
-
 
-
 
-
-
-
 
-
 
-
-

Note: 1) Financial Institutions and private enterprise foreign bond repayments
Sources: MOF, EPB, BOK
 
Source: Ministry of Strategy and Finance. Republic of Korea and The Korea Development Bank. 1993. Foreign capital and the Korean economic development. Seoul.