Pptgroup 6 Final

8/8/2019 Pptgroup 6 Final

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KDI SCHOOLof Public Policy & Management

Korean Economic Development Group 6

CAUSES

IMPACTS - FACTS and EVIDENCE

IMPLICATIONS

POLICY OPTIONS


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US Housing Market Boom and bust in the housing market

Government policies: homeownership for all

Federal Reserves Policies of low interest ratepolicy

High-risk mortgage loans andlending/borrowing practices

Lack of Financial Regulation The Increased Debt/Capital Ratio of

Investment Banks


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1994- NationalHomeownershipStrategy(NHS) was

initiated 1997- Taxpayer Relief

Act: up to US$250,000 exempted from

capital gains taxwhen you sell house


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2003- AmericanDream DownpaymentAct: provided grants

to help first time homebuyers with downpayment and closingcosts


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Government policies intended to realize theideology of political democracy through theexpansion of homeownership for all.

The most fundamental function of the market is to

discriminate between creditworthy anduncreditworthy borrowers, but the governmentnullified this function in the name of politicalideology

Distorting market function of allocating housesonly to those who could afford.

The Federal policy designed to promote morehome ownership among households with incomesbelow the median.


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During 2006, 22% of homespurchased ( .65 million units) werefor investment purposes, with anadditional 4% ( .07 million units)purchased as vacation homes.

A record level of nearly 40% ofhomes purchases were not intendedas primary residences.

Housing prices nearly doubledbetween 2000 and 2006, a vastlydifferent trend from the historicalappreciation at roughly the rate ofinflation


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1. EXCHANGE RATE

2. STOCK EXCHANGE

3. ECONOMIC GROWTH

4. DOMESTIC ECONOMIC INDICATOR

5. EMPLOYMENT

6. CONSUMER PRICE INDEX AND INFLATION


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improvedimproved policypolicy

limitedlimited exposure toexposure towesternwestern banksbanks


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Lehman

Brothers

CollapseSubprimeMortgage

Shock


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LehmanBrothers

Collapse


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2006 20072008 2009

YEAR I II III IV I

GDP 5.2 5.1 2.3 1.2 0.3 -0.1 -4.5 0.2

GNI3

.9 4.8 -0

.6 -0

.6 -0

.4-2

.6 -

1.7-0

.7

Final Consumption Expenditure 5.1 5.1 2.0 1.0 0.1 0.3 -3.2 1.3

Private Consumption 4.7 5.1 1.3 1.1 -0.3 0.1 -4.5 0.2

Government Consumption 6.6 5.4 4.3 0.6 1.5 1.0 1.7 5.0

Gross Fixed Capital Formation 3.4 4.2 -1.9 -2.4 0.2 0.0 -6.7 -0.2

Construction 0.5 5.4 -2.8 -4.2 -0.4 0.7 -3.3 4.4

Facilities 8.2 9.3 -1.0 0.4 1.2 -1.0 -13.9 -9.1

Exports of goods and services 11.4 12.6 6.6 1.8 1.5 -0.1 -8.9 -0.8

Import of goods and services 11.3 11.7 4.4 1.1 1.7 0.3 -14.7 -8.2

(Unit: percent)

(Source: BOK)


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2006 20072008 2009

YEAR I II III IV I

CPI 2.2 2.5 4.7 3.8 4.8 5.5 4.5 3.9

Core Inflation 1.8 2.4 4.2 3.0 3.9 4.8 5.4 4.9

(Unit: percent)


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The capital account balance posted adeficit of 50.9 billion dollars

September it recorded a deficit of 9.1 billiondollars because of the outflow of foreignersstock investment funds

December, the deficit snowballed to 41.8

billion dollars


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November 2008 IMF-World EconomicOutlook

Korea would grow 2 percent in 2009

Less than three months later

the IMF revised its forecast,

downward to a contraction of GDP by 4percent in 2009,

which would be the worst performanceexpected among Asian economies.


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DIFFICULTI SI AI TAI I LEVEL OF

GROWTH.

U WARDTREND OF PRICESISEXPECTED

TO DECELERATE

CURRENT A/CISLIKELYTO REGISTER ASURPLUS ASTHE PACE OFTHEDECLINEIN

IMPORTS OUTSTRIPSTHAT OFEXPORTS INACTIVEFINANCIALINTERMEDIATIONINTHEFINANCIALMARKETS


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Two broad goals:

safeguarding the financial markets

reinstating the financial sector as the patron for the real

economy


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To stabilize the foreign currency mar et, the government

provided external debt guarantees fordomestic banks and

signed currency swap arrangements with majorcountries.

n the otherhand, to bring backstability to the financial

markets, interest rates were cut and the Bond Market

Stabilization Fund was created to increase liquidity and

help restore the flow of credit to the real sector.

Safeguardingthe financial markets:


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FOREIGN CURENCYLIQUIDITYPROVISIONFOREIGN CURENCYLIQUIDITYPROVISION

2008-2009 Government and BOK: $55 billion toprovide foreign currency liquidity

10/08 Government: 3-year $100 billion paymentguarantee for foreign currency borrowing by

domestic banks During 11-2/2008, Korea also made currency

swap agreements of $30 billion each with theUS, Japan and China

As an additional measure for stabilizing theforeign exchange market, the government nowgrants to foreign investors an income taxexemption on interest from government bonds


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INTERESTRATE CUTANDLIQUIDITYPROVISIONINTERESTRATE CUTANDLIQUIDITYPROVISION

To prevent the Lehman Brothers bankruptcyin September 2008 from resulting in a creditcrunch, the BOK reduced the policy rate by

325 base points from 5.25% to 2.0%. To assure liquidity the bank also pumped

23.3 trillion won into the banking systemthrough a Repurchase Agreement (RP) (16.8

trillion won) and treasury bonds (1.7 trillionwon) and the buyback of the MonetaryStabilization Fund (0.7 trillion won)


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The government also moved swiftly and sufficiently to help banks boosttheir capital and maintain a steady flow of credit to businesses.

1. Bank Recapitalization Fund and helped eightdomestic banks raise their capital.

2. Corporate Restructuring Fund and FinancialStabilization Fund

3. Assistance to the SMEs by expanding debt

guarantees and extending loan maturities

4. Task Force to provide assistance to companiesexperiencing short-term financial difficulty


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SUPPORTSUPPORT FORFOR HOUSEHOUSE HOLDHOLD LOAN/MORTGAGELOAN/MORTGAGE HOLDERHOLDER::Measures include guaranteeing collateral supplementation

up to 100 million won for the depreciated value of housing,extending the maturity and grace period of mortgageloans up to 10 years, and exempting the early repaymentfees on the transfer from floating to fixed-rate loans

LARGELARGE SCALESCALE STIMULUSSTIMULUS FISCALFISCAL:: Specifically, the government

has earmarked 51.3 trillion won (5.7% of GDP) for a stimuluspackage, which includes investment in infrastructure,provision for the social safety net (16 trillion won), and areduction in corporate and personal income tax rates (35.3trillion won)

JOBJ

OB SHARINGSHARING:: In order to create new jobs and retainemployment the government will spend 60% of its budget inthe first half of 2009 and launch the Green New DealProject, which will invest 50 trillion won for the purpose ofsecuring future economic growth and employment


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To take steps to encourage a virtuous circle offunds between the financial sector and the realeconomy.

To look for ways to increase the speed andenhance the efficiency of the restructuring process.

To look for ways to reinforce the soundness of thefinancial services industry: utilize the Bank Recapitalization Fund, the Corporate Restructuring

Fund, the Financial Stabilization Fund, and othertools available to help reinforce the soundness ofthe overall financial sector.


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The economy recorded positive growthin 2009

The current account balance has posteda positive figure

The stock market has managed a

sustained rally The exchange rate has gained vis--vis

major currencies


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This optimistic outlook was further bolsteredby the OECD composite leading

indicators(June 8 2009) which showed thatamong its members the sharpest upturn

during the first quarter of 2009 took place inKorea


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Pptgroup 6 Final

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