Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond Korea’s Economic Policy in 2009: - Coping with the global crisis and beyond March 2009

I.Recent Macroeconomic Developments, External Position & Financial Strengths II.2009 Economic Outlook III.Policy Responses

3 GDP Growth Trend: Sharp Slowdown GDP Growth Trend (%) Q1Q2Q3Q4Q1Q2Q3Q4 GDP Growth (qoq, %) (1.0) 4.9 (1.7) 5.1 (1.5) 5.7 (1.6) (0.8) 4.8 (0.8) 3.8 (0.5) -3.4 (-5.6) Private Consumption Facility Investment Construction Investment Export Import

4 GDP Growth Comparison by Country GDP Growth Rates (yoy, %) Q1Q2Q3Q4AnnualQ1Q2Q3Q4Annual Korea Euro zone UK US Japan Hong Kong Taiwan China India Mexico

5 Export Performance and Current Account Current Account Surplus Expected in 2009 Diversified Export Products (2008) Diversified Export Markets (2008) China 21.7% North America 11.0% EU 13.9% ASEAN 11.7% Japan 6.7% Others 20.8% Central & South America 7.9% Middle East 6.3% Korea’s Current Account Balance ( YTD) Export Performance Comparison Current Account Surplus in 2009 (e): US$ 13.4 bn Export Growth (%) (US$ bn) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 3.0 (E) ‘09 ‘08 ‘09 ‘08

6 Moderating Inflation Downward Trend in CPI (2008 – Jan.2009) Korea CPI (%) World CPI (%) ‘09

7 Deteriorating Job Market Situation Change in Number of Jobs Unemployment Rate Unemployment Rate (%)Change in Number of Jobs (‘000) (1) Korea 3.6% Japan 4.1% US 7.6% Euro zone 8.2% (1) US: non-farm payrolls / Korea: Number of employed people ex-agriculture ‘09

8 Korea’s FX Reserves Major Global Reserves Holders Korea’s FX Reserves (US$ bn) Deposit 23.6 (11.7%) Bonds mostly rated AA or above (87.9%) Others 0.7 (0.4%) Foreign Reserves Composition (US$ bn) (US$ bn) Source: Bank of Korea, as of Jan 2009 Source : MoSF, as of Feb 09

9 Korea’s External Debt (96.4% of Reserves) * Short-term debt: Debt with original maturity shorter than 1 year * Current debt: Debt with remaining maturity shorter than 1 year (75% of Reserves) (US$ bn, as of Dec 2008) (43% of GDP) External Debt Composition (US$ bn, as of Dec 2008) Banks’ External Debt Domestic Banks Foreign Bank Branches (US$ bn, as of Dec 2008) Hedges for shipbuilders’ export and overseas financial investment (10.2%) Cash advances for shipbuilding contracts (15.5%) Foreign Investors’ loan regarded as FDI (1.2%) Non- obligatory (26.9%)

10 Korean Banking Sector NPL Ratio Coverage Ratio Loan to Deposit Ratio BIS Ratio Bank Recapitalization Fund *As of Dec.08, others as of Sep-08 * As of Dec 08, others as of Sep 08; (e) estimate * As of Sep-08 * As of Jul 08, others as of Nov % (e)

11 Household Debt and Mortgage Loans Mortgage Loans and LTV Household Indebtedness Stable Housing Price Changes Delinquency Ratio of Mortgage Loans KoreaUSHKGermanyJapan Mortgage/ GDP 33.4%72.3%37.3%52.4%36.2% Regulation System DirectIndirectDirectMixedIndirect LTV Limit40-60%None60-70%60%Indirect * Korea’s LTV ratio 45.9% (as of Sep 2008) (%) Housing Price Changes (YoY, %) * As of the end of 2007 *As of Sep-08 (%) 20.0

12 Another Financial Crisis in Korea? Asian Financial Crisis (late 1997) 1 External Sector Banking Sector Foreign Currency ReservesUS$ 201.5bn 2 US$ 8.9bn ST External Debt a / FX Reserves75.0% % Current External Debt b / FX reserves96.4% % Current Account BalanceUS$ 13bn (e) 5 US$ -8.2bn Bank NPL Ratio1.1% 3 6.0% BIS Ratio12.2% 3 7.0% 1 as of end of as of February as of December as of September estimate Corporate Sector Debt to Equity Ratio104.3% % Interest Coverage Ratio457.2% % a Short-Term Debt: Debt with original maturity shorter than 1 year b Current Debt: Debt with remaining maturity shorter than 1 year Current

I.Recent Macroeconomic Developments, External Position & Financial Strengths II.2009 Economic Outlook III.Policy Responses

Economic Outlook Korea 2009 Estimates Source: MoSF GDP Growth Number of Job Creation Current Account Balance CPI -2% -200 thousand USD 13 billion High 2% range

I.Recent Macroeconomic Developments, External Position & Financial Strengths II.2009 Economic Outlook III.Policy Responses

16 Korea’s Fiscal Policy Responses Tax Cuts KRW 35.3 trn Public Spending KRW 16.0 trn Total (% of GDP) KRW 51.3 trn (5.4%) Total 2009 KRW 11.7 trnKRW 11.4 trn KRW 23.1 trn (2.6%) 60% of total expenditure to be disposed in H Tax cut and fiscal expansion will boost domestic economy A revised supplementary budget will be submitted during March 2009 to create more jobs, support SMEs and export companies and improve public welfare Korea ( ) US ( ) Japan ( ) China ( ) EU ( ) France ( ) Germany ( ) UK ( ) Amount (Local) KRW 51.3 trn USD 1.1 trn JPY 11.2 trn RMB 4 trn EUR 200 bn EUR 26 bn EUR 81 bn GBP 20 bn % of GDP 5.4%8.0%2.2%16%1.5%1.4%3.3%1.4%

17 Korea’s Fiscal Position Budgetary Surplus (% of GDP) Consolidated Budget Balance E: estimated Source: Ministry of Strategy and Finance Source: OECD Economic Outlook (December 2008) 2008 General Government’s Gross Financial Liabilities/GDP (%, estimated) OECD average : 79.7% Public Debt

18 UK 4.00%p Monetary Easing Policy Rates in Major Economies (%) Korea 3.25%p US 1.87%p Euro zone 2.25%p Japan 0.40%p

19 Policy Measures for Currency & Financial Markets 1. Dollar Liquidity Provision  US$ 30.8 billion provision to the banking sector (Oct 2008~Feb 2009)  Three Year Guarantees of banks’ foreign borrowing up to US$ 100 bn (Oct 2008)  Currency swap lines with U.S. (Nov 2008), China (Dec 2008) and Japan (Dec 2008) (USD 30 billion each) 2. Banks’ Recapitalization  “Bank Recapitalization Fund” (KRW 20 trn) established (Feb 2009) 3. Bond Market Stabilization  “Bond Market Stabilization Fund” (KRW 10 trn) established (Dec 2008)

20 Building Global FTA Networks EUUSMexicoKoreaJapanAustraliaThailand FTA Status by Country  Promote trade liberalization and economic reforms  Pursue comprehensive and high level of FTAs with conformity to WTO spirits EUEFTA GCC China Russia India Turkey ASEAN Singapore Japan Australia New Zealand Canada Mexico PeruMERCOSUR Chile EffectiveNegotiatingPreparing USA (Number of FTA Counterparty Countries)

21 SME Sector Restructuring & Support Sound SMEs A B C D Signs of Bankruptcy? Recoverable? A B C D Sound SMEs: Support YES NO YES Potentially Risky SMEs: Support Risky but Recoverable: Workout Irrecoverable: Liquidation Shorten the evaluation process from 3 months to 15 days for timely liquidity provision Fast Track Restructuring for SMEs Restructuring process, incl. on-the-spot survey and workout of 13 C-rated companies* is currently undertaking * 11 in construction & 3 in shipbuilding Weak SMEs Rollover of SME Loans Maturing in 2009 KRW 160 trn KRW 160 trn Extend KRW 160 trn KRW 160 trn Enhanced Government Support on SMEs (2009) KRW 46.3 trn KRW 46.3 trn The Government’s guarantee to SME will be further increased to KRW 64.3 trn 46.3 trn 9 trn KRW 64.3 trn Planned New increase (16 Feb)

22 Job Sharing & Job Creating Job Sharing  To provide tax incentives for job sharing companies and workers  Job sharing by cutting the initial wage New Jobs in Public Sector  New internship programs in public institutions (23,000 in 2009)  New social service jobs (126,000 in 2009) Strengthening Social Safety Net  New training programs for the unemployed (150,000 in 2009)  Incentives increased for SMEs keeping workers Enhancing Labor Market Flexibility  Various new measures for enhancing labor market flexibility (eg. Shorten advance lay-off notice period; Implement flexible working hours and wage schemes)

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