International Business – Trimester 5

Why Did the Korean Won Collapse?

Group 2:Biju Sebastian 22Chetan Gulati 27Deepak Uppal 30Devansh Bansal31Jachak Ajit 45

11th Dec 2010

International Business – Trimester 5

Agenda

About Korea SouthAbout Won, ChaebolsCase SummaryBandwagon EffectKorea Today

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About South KoreaRepublic of Korea with capital Seoul Independence 15 August 1945 (from Japan) Population 48,87500 ,Density 491/km2 GDP2010 estimate  - 

Total $986.256 billion Per capita $20,165

Gini (2007) 31.3 (low)  HDI (2010) 0.877 (very high) (12th)Currency South Korean won (₩) (KRW) Major economy, a full democracy and a regional power in East

Asia. The economy is export-driven, with production focusing on

electronics, automobiles, ships, machinery, petrochemicals and robotics

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About South Korea• Age structure:

– 0-14 years: 16.8% (male 4,278,581/female 3,887,516)– 15-64 years: 72.3% (male 17,897,053/female 17,196,840)– 65 years and over: 10.8% (male 2,104,589/female 3,144,393) (2010 est.)

• Exports -$373.6 billion – China 21.5%, US 10.9%, Japan 6.6%, Hong Kong 4.6% (2008)

• Imports-$317.5 billion (2009 est.)– China 17.7%, Japan 14%, US 8.9%, Saudi Arabia 7.8%, UAE 4.4%, Australia 4.1% (2008)

• Reserves of foreign exchange and gold: • $270 billion (31 December 2009 est.)• Debt - external: $370.8 billion (31 December 2009 est)

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About South Korea

Gyeongbokgung royal palace in northern Seou

Great Southern Gate

Bridge of No Return National.Assembly

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Korean Currency History

Japanese invasion of Korea

Return of Won as Korea gained Independence

Devaluation of Won ( 1$ = 6000 Won) due to Korean war which ended in 1953. Hwan introduced at 1 hwan = 100 won

hwan suffered from inflation as well (1$ = 1250 Hwan)

Date introduced

Value of $

June 10, 1962 125

May 3, 1964 255

August 3, 1972 400

December 7, 1974

480

January 12, 1980

580

Pegging of Won

Floating on Dec 24,

1997 - East Asian financial crisis

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1 U.S. dollar = 1 142.85714 South Korean won – Today

Won depreciation - Negative impact on the South Korean economy, which is heavily dependent on large imports of capital goods and energy.

Won appreciation - in 1999 and 2000, was the result of a gradual economic recovery, contributed to the recovery itself by decreasing the cost of imported goods and fuel.

Korean Currency History continue…

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Chaebol•The Korean word “chaebol “means "business family" or "monopoly" and is often used the way "conglomerate" is used in English

•The chaebol are the large, conglomerate family-controlled firms of South Korea characterized by strong ties with government agencies.

•They are powerful global multination owning numerous international enterprises.

•There are several dozen large Korean family-controlled corporate groups which fall under this definition. Through aggressive governmental support and finance, some have become well-known international brand names, such as Samsung, Hyundai and LG.

•The chaebol has also played a some significant role in South Korean politics.

•Some chaebol are one large corporations, while others have broken up into loosely connected groups of separate companies sharing a common name. Even in the latter case, each is almost always owned, controlled, and/or managed by the same family group

•chaebols controlled by the owner's family or the largest shareholders

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Economic Perspective

•Investment lead economic boom in 1994-1995• Growth of Export oriented industries

Reasons

• Ambitious Political back to boost economic growth • Chaebols were encouraged to invest in new factories• Declined investment quality by Chaebols – unrealistic projections about future demand conditions• Excess capacity and falling price• Significant increase in risk of corporate bankruptcy

Case summary

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Case summary continue…

Financial Perspective

Won lost around 67% of value in 1997Massive $ 55 billion rescue package in

Back ground

•Built up massive debt by Chaebols •Much of borrowing in USD instead of Korean Won – Due to stable Dollar / Won exchange rate and lower interest rate for Dollar borrowing

• Risks• Currency depreciation would raise borrowing cost• May deperess corpoarte earning• Increase risk of Bankrupcy

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Case summary continue …

Roller cost impact in 1997

• Foreign investors are alarmed at rising debt level of South Korean companies• Korean companies were not able to service their debt payment• Foreign investors started withdraw their money from Korean stock and bond market – They sold Korean won and started purchasing Won• Increased supply of Won and increased demand of USD pushes exchange rate • Korean central bank intervene to arrest sliding Won against USD• Due to risk of Corporate bankruptcy, Govt stated intentions to take some troubled companies• Down grade of South Koreans sovereign debit by Standard & poor’s

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Remarkable recovery after the 1997 Asian financial crisis

•Displayed excellence in several noted industries like shipbuilding, semiconductors, construction, digital electronics and automobiles

•Undertaking Economic reforms

•Promoting exports

•Easing regulations to help attract foreign direct investment

•Eased visa rules for foreign investors

•Established special zones in selected areas to make its environment more attractive to overseas trade and foreign investment, in a bid to become a Northeast Asian business hub

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Remarkable recovery after the 1997 Asian financial crisis

•Efforts to seal free trade agreements (FTAs) with its trading partner•Korea-Chile Free Trade Agreement (KCFTA) was signed in February 2003

•The Korea-Singapore free trade agreement was signed in August 2005

•Korea-ASEAN FTA was signed in late November 2007

•Korea-U.S. free trade agreement (KORUS FTA) on Apr. 2, 2007

•Korea-India Comprehensive Economic Partnership Agreement (CEPA), Jan. 1, 2010

•Korea-EU Free Trade Agreement (FTA), Oct. 6, 2010

•Korea has also been negotiating free trade deals with Canada, Mexico, the Gulf Cooperation Council (GCC), Australia, New Zealand, Peru, Columbia and Turkey. The groundwork is being laid for FTA negotiations with China, Japan, MERCOSUR, Russia, Israel and the South African Customs Union.

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Reason for recent N – S Korea Conflict

Calculated attempt by the regime to exploit divisions and extract concessions from the international community

North Korea's intention to turn this region into a conflict zone so that it can bring the concerned parties to the discussion table.

North Korean leader Kim Jong Il has been to China twice in 2010, "begging for aid" and has not received much in return. Millions of North Koreans have starved to death in the past 10 years.

North Korea has nuclear capability and tried to make a point that they should not be lightly regarded.

The ailing North Korean leader, Kim Jong-il, seeks to reassure the country as his son Kim Jong-un prepares to take over. An attempt to gain support of N Korean army and people. An attempt to prove he is brave.

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