Korean Economy: Embracing Changes, Ready for the Future May 2006 Ministry of Finance and Economy

- 2 - Economic Development of Korea Trade Volume Gross Domestic Production US$ 788 bn. in 2005 With continued solid growth, Korea has emerged as one of the most resilient and dynamic economies in the world. US$ 546 bn. in 2005

- 3 - Overcoming Financial Crisis Pursuing Market Liberalization Improving Corporate Governance Restructuring Financial Markets Implementing Extensive Deregulation

- 4 - Sound External Sector FX Reserve Short-term external debt/FX reserves (%) With foreign exchange reserves of US$ 223 billion, Korea’s external sector is sound.

- 5 - Competitive Corporate Sector Korean companies are leading global market with high quality products and sophisticated designs while their financial strengths have greatly improved. Debt / Equity Ratio Leading Global Players

- 6 - Improved Profitability of the Financial Sector (%)(%) Banks’ ROA (Return on Assets) NPL Ratio Average ROA of U.S. commercial banks : 1.34% (%) 1.2% As a result of restructuring efforts, profitability and soundness of the banking sector have continuously improved.

- 7 - Achieving a Balanced Growth With the pace of domestic consumption recovery gathering speed, exports maintain double digit growth rate despite the appreciation of the KRW. Private Consumption Exports Performance

- 8 - Projection for 2006 Recent GDP Growth Achieving Potential Growth Rate The recovery of the Korean economy is accelerating and we expect to achieve the potential growth rate of around 5% this year.  Growth : Around 5%  Job Creation : 350~400 thousand  Maintain Current Account Surplus

- 9 - Prospects for the Korean Economy GDP (US$ 788 bn.) Trade Volume (US$ 546 bn.) trillion trillion trillion If the current solid growth continues, Korea’s GDP is forecast to reach US$ 1 trillion by trillion

Investors’ Confidence in the Korean Economy Sovereign Credit Ratings A- A A A+ Stable Positive Spread on Sovereign Bonds (ROK ‘14) Improved competitiveness of the Korean economy can be shown in the upgrade of its sovereign credit ratings and tighter credit spread. (bp)

Recent Changes in the Global Economy Fierce and Borderless Competition between Companies Free Movement of Technology, Information, Human Capital Enormous Pools of Capital Circling Globe at Dizzying Speed “World Is Flat” – Thomas Friedman, NY Times Columnist

Vision of the Korean Economy Recent rapid changes of the global economy require new policy paradigm. More Nimble and Flexible Policy Responses for New Challenges More Mature and Efficient Market Economy Economy with Strong Social Safety Net More Open and Globalized Economy

Major Policies for Future Prosperity Expanding Growth Potential Advancing Financial System Enhancing Flexibility of Labor Market Creating a More Globalized Economy Overcoming Challenges - Oil price hike, Appreciation of KRW, Aging population

Expanding Growth Potential Ease regulations and offer various incentives to promote investments Ease regulations and offer various incentives to promote investments Bolster dynamism of SMEs and venture companies Bolster dynamism of SMEs and venture companies Develop new growth drivers: high value added service, knowledge- based, and high tech industries Develop new growth drivers: high value added service, knowledge- based, and high tech industries Nurture people with advanced skills and creativity Nurture people with advanced skills and creativity - Foster the talented in science & engineering sector - Foster the talented in science & engineering sector - Lure foreign academic institutions and foreign professionals - Lure foreign academic institutions and foreign professionals - Expand R&D expenditure - Expand R&D expenditure

Advancing Financial System Introduce ‘Financial Investment Services and Capital Market Act’ by combining asset management, securities, futures regulations Introduce ‘Financial Investment Services and Capital Market Act’ by combining asset management, securities, futures regulations - Enable emergence of advanced investment banks - Enable emergence of advanced investment banks - Allow development of almost all types of investment instruments - Allow development of almost all types of investment instruments Further liberalize foreign exchange transactions Further liberalize foreign exchange transactions - OECD capital movement liberalization ratio : 59.4% → 85.1% - OECD capital movement liberalization ratio : 59.4% → 85.1% - Accelerate the time frame of full foreign exchange liberalization - Accelerate the time frame of full foreign exchange liberalization

Enhancing Flexibility of Labor Market Supreme Court: significant flexibility in judging “urgent managerial reasons” * required for workforce adjustment * Decline in operational performance, shifts in manufacturing method, changes in industry structure Further enhance the flexibility by easing requirements and procedures for workforce adjustment Strengthen social safety net - Help the unemployed by providing training & education opportunities

Creating a More Globalized Economy Recent FDI Trend Further globalization will lead us to a more advanced market economy. Free Trade Agreements Concluded : Chile, Singapore, EFTA Concluded : Chile, Singapore, EFTA Under negotiation : US, ASEAN, Canada, Mexico, India, Japan Under negotiation : US, ASEAN, Canada, Mexico, India, Japan Joint Study : MERCOSUR Joint Study : MERCOSUR US$ 11.6 bn. in 2005

Pursuing Multi Track Approach on FTAs Concluded Concluded *EFTA (Iceland, Switzerland, Lichenstein, Norway) Under Negotiation Joint Study Joint Study *Mercosur (Brazil, Argentina, Uruguay, Paraguay) ASEAN Canad a Japa n U.S.A Indi a Singapore Chile EFTA* Mexic o Mercosur *

Strong Commitment to Globalization Our commitment to continuous market opening and foreign investments is as strong as ever. Foreign Investors are crucial to the strength and dynamism of our economy. “Protect lawful and justly earned profits of foreign companies” “Provide a level playing field for all companies regardless of nationality”

Overcoming Challenges Oil Price Hike Enhance energy efficiency of each industry Expand overseas natural resource developments Promote research on renewable energies Appreciation of KRW Utilize as an opportunity to sharpen competitiveness Utilize as an opportunity to sharpen competitiveness Aging Population Expand childcare infrastructure and strengthen support for childbearing expenses Expand childcare infrastructure and strengthen support for childbearing expenses Increase labor force participation of women & senior citizens Increase labor force participation of women & senior citizens

Strengthening Economic Cooperation with U.K. Trade Volume: US$ 8.5 bn. “2 nd Largest in Europe” Korea’s Investments into UK: US$ 2.7 bn. “2nd Largest in Europe” UK’s Investments into Korea: US$ 6.2 bn. “3rd Largest in Europe” Expand trade & investment and strengthen strategic partnership in hi-tech industries such as IT and BT.

Developing Free Economic Zones In-Cheon  Chong-Ra (18km 2 )  Tourism, Leisure Gwang-YangGwang-Yang PusanPusan  Young-Jong (138km 2 )  Logistics, International Business  Gwang-Yang (90km 2 )  Logistics, Cutting-edge Industries  Song-Do (53km 2 )  International Business, IT, BT, R&D Industries  Pusan· Jinhae (105km 2 )  Free Trade Zone, R&D, International Business

Financial Hub in Northeast Asia We also welcome your active participation in our financial market. Improve asset management-related regulations Market-Friendly Regulatory System Korea Investment Corporation Stock Market Provide a more efficient and globalized trading environment Spearhead development of asset management industry Offer longer-term fixed income instruments Bond Market

Success Stories in Korea Foreign Companies’ Market Share Many global companies are already enjoying success in Korea. * including joint ventures Leading U.K. Companies in Korea

Thank you.