The overall external position of Korea is expected to remain strong as capital inflows are projected to pick up further in the second half of the year. There has

been a rapid regaining of confidence in Korea among international investors, and portfolio investment (net) from abroad during the first five months of the year totaled $3.4 billion. These inflows have helped push up the stock market index as well as support the balance of payments. While portfolio inflows can be expected to continue, the capital account will also be helped during the second half of 1999 by expected privatization receipts and by disbursements from previous commitments of foreign direct investment. These capital flows -- taken together with the forecast current account surplus -- mean that reserves can be further accumulated beyond the present level which is nearing $60 billion.

It may be mentioned that during the remainder of 1999, the authorities have considerable debt repayments to make in foreign exchange, but these can

3 Remarks by Michel Camdessus, Managing Director of the International Monetary Fund at the International Monetary Conference, Philadelphia, Pennsylvania, June 8, 1999

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comfortably be accommodated given the present balance of payments

projections. In regard to the IMF, Korea has already made SRF repayments of

$8.45 billion and by the end of this year will have repaid the bulk of the obligations to the Fund.

3. Structural Policies

It is now generally recognized that the Korean foreign exchange crisis of 1997 developed out of structural problems, mainly in the corporate and financial sectors. The loss of international confidence that Korea experienced in the latter half of 1997 was triggered by corporate distress, falling productivity, excessive investment, huge private sector foreign-denominated indebtedness, and a weak and poorly supervised financial sector. What made the situation worse was a nontransparency in both public and private domains which made the depth of the country’s problems difficult to assess.

The foreign exchange crisis gave the then new government an unprecedented opportunity to change and reform the system through policies incorporated in the IMF-supported program. The authorities did seize the opportunity, and took many initiatives under the auspices of the program to restructure the financial and corporate sectors and to further open the economy to foreign investment and greater competition.

4 $7.4 billion would be remaining debt to the Fund by end of this year.

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Over the past eighteen months, the authorities have put in place significant structural reforms that will ultimately translate into higher factor productivity and technological advance which will provide the basis for strong sustained growth over the medium term. However, there is still much that remains to be done to bring the structural reforms in both the financial and corporate sectors to fruition. I would identify here in a brief way only some of the most critical challenges for the coming year.

a. Financial Sector Restructuring

In order to place the financial sector on a sound and competitive basis, it will be important to:

•

Move forward with the privatization of government-owned banks and also attract foreign capital to help rehabilitate nonbank financial institutions.

•

Continue to upgrade prudential regulations toward international

standards for the banking system; banks should be strongly supervised to

ensure that problem loans are well-provisioned and that banks maintain adequate capital to guard against risks. If banks fail to meet the criteria, then further rationalization of the system may need to be carried out.

•

Continue to strengthen nonbank financial institutions by subjecting the

nonbanks and trust operations to prudential regulations that are consistent

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with those in the banking system.

In particular, for securities companies and investment trust companies, there is a need to: (i) carefully segregate clients funds from proprietary accounts; (ii) have fair value on the books for traded assets i.e. to mark to market values; and (iii) reduce connected lending activities.

b. Corporate Sector Restructuring

•

Corporates should continue to take measures to reduce their reliance on

undermine the recovery and leave the financial system in a vulnerable state.

•

To this end, the authorities need to ensure that the top-five chaebol adhere to their commitments as set out in the Capital Structure Improvement Plans

be needed to make sure that best efforts are being made by the chaebol to reach the CSIP commitments.

•

For the smaller (6-64) chaebols and other large distressed companies, debt

5From June 2000, the loan classification, provisioning rules, and capital adequacy

computation rules used for commercial banks will be extended to merchant banks. Insurance companies are, in addition, introducing an EU solvency margin standard that will be

gradually raised to international standard over the next few years.

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completed workout arrangements should be implemented as planned, and where measures have not been taken or where debt service is not paid in full, sanctions need to be imposed.

•

Corporates should also continue to rationalize production facilities and business lines so as to reduce excess capacity and improve productivity

•

Finally, further progress is needed to ensure that corporate governance

and competitive environment for the corporate sector as a whole. Although

considerable advances have been made in institutional changes, there is a

need to make accounting, auditing, outside directorships, and minority

shareholder rules more effective in implementation.

KERI, Han Kook Ilbo Seminar