Ladies and gentlemen, I would like to welcome all of you and thank you for taking the time to be with us today.

My presentation today largely consists of three parts.

Firstly, I will give you a brief overview of Korea’s real economy and financial market and move on to talk about newly emerging risk factors in the Korean economy and their effect on the economy.

Then, I will close by introducing how the Korean government is responding to the economic challenges.

Now, let me start with the current status of the Korean economy and financial market.

First of all, let me talk to you about the current status of Korea’s real economy.

As some foreign investors are concerned, it is true that Korea’s real economy is fast deteriorating. Domestic demand is slowing down rapidly with 19.8 percent fall in December industrial output from a year earlier as well as 7.0 percent decline in consumer goods sales. Exports in December also fell by 17.9 percent year-on-year (by 29 percent according to the estimation for the period from Jan. 1 to Jan. 20).

However, let me emphasize that such economic slowdown is not limited to Korea and is witnessed commonly around the world following the global financial crisis. The Korean economy is doing rather well compared to other Asian countries like Hong Kong, Taiwan and Singapore.

If we compare December industrial output, Korea saw 19.8 percent fall while Taiwan and Singapore suffered 32.4 percent and 13.5 percent decline respectively. Even in terms of export, which is one of the main causes of concern, we see that Taiwan and Singapore have recorded greater fall than Korea with 41.9 percent and 20.8 percent decline respectively.

Moreover, Korea is maintaining relatively low unemployment rate of 3.3 percent as of last December.

However, things are looking better in the financial market. To our relief, the global financial market volatility has eased slightly, improving investor confidence and financial stability in Korea.

The Korean stock market has recently regained the 1100-level after falling to 930-level last October, when the investor sentiment was seriously hurt by the global crisis. In particular, foreign investors has shifted from net-selling to net-buying, posting a net-buying of 0.85 trillion won in December and 0.73 trillion won in January on local equity markets.

In case of the bond market, the treasury bond rate is continuously falling due to policy rate cuts, and the corporate bond rates are also stabilizing thanks to the government’s proactive measures, including corporate restructuring plans and the creation of the bond market stabilization fund.

Meanwhile, the rapid weakening of the Korean currency has eased on the back of the foreign investors’ net-buying of local stocks as well as the current account surplus. The Korean won depreciated by 32 percent from end of 2007, which was larger than other currencies. But since November 2008, the won strengthened by 6.6 percent, while other currencies posted lower appreciation rate.

And the credit crunch has been alleviated to some extent as the money market spread has fallen after a sustained upward movement.

Now, I will move on to the second part of my presentation and look at some of the risks and challenges facing the Korean economy.

There are four main risk factors in the Korean economy.

The first concerns the possibility of a rapid deterioration of the domestic economy following a sharp decrease in exports and a slowdown in domestic consumption triggered by the global economic recession.

The second risk factor is the possibility of private sector defaults including household credit defaults caused by real estate price fall and corporate bankruptcies resulting from economic recession and credit crunch.

The third factor relates to the growing worry that Korean banks’financial soundness can be deteriorated by non-performing household and corporate loans. In addition, people are increasingly concerned about a currency liquidity problem that can be caused by the mismatch between funding and fund management as indicated by high loan-to-deposit ratio.

And lastly, the foreign currency liquidity problem and external debt defaults are continuously raised as a potential threat to the economy.

I will address these one by one, starting with the possibility of a rapid economic recession.

Recently, some investment banks have forecasted a negative growth of the Korean economy in light of the adverse effect from the global financial crisis. Since the Korean economy largely depends on the global economic conditions, it is hard to predict its future growth. Even IMF and OECD are constantly changing their outlook on the Korean economy. Nevertheless, the situation in Korea is not so bad relative to other Asian countries. Nine investment banks forecast that Korea will grow by an average of -2.3 percent while Hong Kong, Taiwan and Singapore are expected to grow by -2.3 percent, -1.3 percent and -3.0 percent respectively, despite recording growth rates higher than Korea’s in 2007.

Let me also highlight that the Korean economy is highly resilient to crisis. During theAsian financial crisis in 1998, Korea’s economic growth rate plummeted to -7 percent like Malaysia and Thailand, but Korea was much faster in overcoming the crisis as it posted 9.5 percent growth in 1999 while Malaysia and Thailand posted 6 percent and 4.4 percent growth respectively.

So while it is true that the Korean economy is having a difficult time today, the latest growth forecasts and the past experience of theAsian financial crisis tell us that Korea’s economic fundamentals are relatively stronger than other Asian countries’.

Next, let me counter the concern about private sector defaults, first focusing on the household sector.

Nose-diving housing prices and ensuing household loan defaults are causing serious problems in the U.S. and Europe. But in Korea, we do not see any notable housing price bubble or drop in housing prices. First of all, the housing prices in Korea rose by 6.7 percent between 2001 and 2007 while they rose by 9.4 percent in the U.S., by 12.6 percent in the UK and by 9.7 percent in Ireland. The prices have stayed relatively stable in Korea with a price increase of 4.1 percent since 2008 while housing prices fluctuated much in other countries, with 15.0 percent decrease in the U.S., 4.0 percent decrease in the UK and 9.3 percent decline in Ireland.

Korea’s household delinquency ratio is particularly low compared to the U.S. where the current financial crisis originated. While there is 20 percent delinquency on subprime mortgage loans and 4.34 percent on prime mortgage loans in the U.S., Korea’s household delinquency ratio is 0.5 percent as of end-November 2008, which is much lower than the U.S. prime loan delinquency ratio

The loan-to-value (LTV) ratio is 94 percent for the U.S. subprime mortgage loan but is 45.4 percent for Korean mortgage loans. Therefore, we think there will be sufficient buffer against falling housing prices.

Moreover, since the recent rise in mortgage loans in Korea is mostly attributable to the high-income class, there is smaller chance of defaults.

Now let me address the risk factor of possible corporate sector default.

Since the Asian financial crisis, Korea’s corporate sector has improved greatly in terms of the fiscal structure and profitability. The interest coverage ratio of the entire corporate sector used to be only 64 percent in 1998 but it rose to 405 percent by the end of 2007. (If necessary: The accurate data of 2008 is not available at the moment, but the interest coverage ratio of listed companies as of June 2008 was 1142 percent. So we judge that Korean firms maintain strong business capacity today.)

The total borrowings and bonds payable to total assets soared to 50 percent in 1997 but continued falling ever since to reach 24 percent by the end of 2007.

In addition, the debt to equity ratio once hit 425 percent but has fallen to 106 percent by the end of 2007.

As these indicators illustrate, Korean companies’ financial structure has kept improving. Even under the current financial crisis, Korea’s corporate sector remains financially healthy relative to advanced countries like the U.S. and Japan. The liquidity ratio at the end of 2007 was 125 percent , similar to 133 percent of the U.S., 126 percent of Germany and 131 percent of Japan. But the equity to total asset ratio of Korea’s corporate sector is 48 percent, which is higher than in the U.S.’ 44 percent, Germany’s 34 percent and Japan’s 30 percent. Korea excels in terms of the debt to equity ratio as well. While Korea’s corporate sector debt ratio stands at 107 percent, the U.S., Germany and Japan recorded 127 percent, 191 percent and 232 percent corporate debt ratios respectively.

Although further deterioration of the economy will affectKorean businesses, I am convinced that Korea’s corporate sector is stronger than it was during the previous financial crisis and it will absorb the shock better than others.

The third risk factor is related to the soundness of banks. The greatest concern about banks’soundness is the possibility of SME loan and household loan defaults. It is true that the delinquency ratio has been increasing under the present economic circumstances. However, the SME loan delinquency ratio and the household loan delinquency ratio stand at 1.7 percent and 0.5 percent respectively as of last December, which is not a worrisome level.

The coverage ratio, too, has continuously risen to 175.1 percent at the end of September 2008. I understand there is an increasing concern over growing NPLs and additional provisioning undermining banks’performances. But I can tell you that Korean banks have already acquired good shock absorbing capability based on the high coverage ratio.

Foreign investors have often raised issues with Korean banks’high loan-to-deposit ratio. The loan-to-deposit ratio is 101.6 percent including CD and 118.8 percent excluding CD, which is relatively high compared to other countries. However, it must be considered that risky assets and derivatives such as CDO and MBS, which are the main culprit behind today’s global financial crisis, account for very little in the investment portfolio of Korean banks.

Now, will there be external debt defaults?

There had been worries about declining foreign currency reserves, but such worries have been eased as the foreign currency reserves started to increase in December last year and surpassed $ 200 billion again.Another good news is that Korea’s current account balance has swung to surplus after sustaining deficit till last September. The current account deficit was mainly caused by rising international oil prices, but now as oil prices are on a downward trend, Korea has begun to record current account surpluses. There are varying outlooks on Korea’s current account balance but the overwhelming opinion is that the surpluses are here to stay.

And, If I breakdown the total debts by their nature, it is estimated that $152 billion out of 420 billion, or about one third, are virtually at no risk. In other words, they are not subject to any repayment burdens in the future.

That is because 7 billions are pre-FDI funding, 94 billions have been incurred as a result of FX forwards hedging of pre-contracted future cash flows, and 51 billions are advance receipts for shipbuilding contracts. When we exclude these repayment-free debts, the genuine foreign debt of the Korean economy is
about $268 billion, and far less below the acclaimed $420 billion level.

So I have talked about the main issues related to some of the risk factors in the Korean economy.

As I have mentioned, there is no denying that the Korean economy is going through a tough time due to the global financial crisis and economic recession, but it is well equipped to absorb the shock coming from the world-wide crisis.

And the Korean government, for its part, is making various policy efforts to minimize any harmful effect of the crisis on Korea’s financial and economic system.

There are three parts to the government’s policy efforts.

The first is the liquidity support policy designed to ease the downward pressure on the economy.

The second part is aimed at preventing private sector defaults. There are policies for reducing the burden on households as well as policies for providing financial support to the corporate sector and for promoting corporate restructuring.

And the last part includes recapitalization policies for prevention of financial sector defaults.

Now, let me go over them one by one.

The Korean government has announced a fiscal stimulus package worth 51.3 trillion won.

It includes corporate and personal tax cuts amounting to 35.3 trillion won and expansion of public expenditure worth 16 trillion won.

The size of the public expenditure expansion accounts for 5.7 percent of GDP, which is smaller than that in China but larger than in countries seriously affected by the economic slowdown, such as the Japan and the EU.

In addition, the Korean government is aggressively pursuing measures to provide liquidity amounting to a total of 90 trillion won, which includes 20 trillion won for local currency liquidity support and 55 billion won for foreign currency liquidity provision

One thing to be noted is that the Korean government has the capacity for further expansion of expenditure. As you know, the Korean government is recording continued fiscal surpluses. As of September 2008, the fiscal surplus accounted for 2.3 percent of GDP, and we are expecting continued surpluses in 2009 despite possible reduction in size.

The government also has room for additional interest rate cuts since the policy interest rate is currently higher than other countries at 2.5 percent.

Moreover, the Korean government’s debt-to-GDP ratio is 32.6 percent, which is far below the OECD average of 79.7 percent.

The Korean government is pursuing measures designed to relieve the burden on households.

First of all, the government is aggressively lowering the policy rate leading to joint fall in loan rates. This is expected to ease households’debt repayment burden.

Secondly, the government is considering expansion of credit restoration fund programs as a way to help struggling households. At present, the government is helping defaults of financial obligations with their debt restructuring to lessen the repayment burden and supporting high interest rate payers to transfer to cheaper loans through bank loans.

Thirdly, the government is pursuing a number of measures to reduce the burden of mortgage repayment, one of which is the government’s guarantee of the depreciation in housing prices to the maximum of 100 million won. This guarantee is provided by the Korea Housing Finance Corporation for the loans that exceed the LTV limit due to the declining housing price. In addition, the government is extending the due date and the grace period of loans including mortgage. And if a lender wishes to transfer from a floating rate loan to a fixed rate loan, the government exempts the lender from the early repayment fee as a way to ease the burden of high interest rate.

Now, let me talk about the Korean government’s financial support to the corporate sector.

In 2009, the Korean government plans to supply a new funding of 50 trillion won to SMEs. The government will try to front-load the funding in the first half of the year as the economic slowdown forecasted in the first half can take serious toll on the real economic sector.

There is also a plan to strengthen support through policy banks and national guarantors. The corporate loan will be expanded by a total of 14 trillion won through 3.4 trillion won capital increase in KDB and IBK, and additional 1.1 trillion won will be invested in KODIT and KIBO to increase supply of guarantee by 11.7 trillion won.

Moreover, the government has created a bond market stabilization fund to increase the demand for corporate bonds, thereby facilitating liquidity provision in the real economic sector. A total of 10 trillion won will be raised for the bond market stabilization fund via investment by financial institutions, which will be spent to purchase corporate bonds, P-CBO and PF ABCP. In case of bonds with low credit ratings, investment will be made through credit enhancement by KODIT and KIBO. The fund has been established on December 17 last year and has raised 5 trillion won thus far, and it will expand investment in bonds reaching their due.

Next, I will move on the worry about corporate sector defaults. The Korean government has a systematic restructuring scheme not only to prevent risk factors in the corporate sector but also to support healthy companies that can serve as the growth engine for the Korean economy after the crisis.

There are three parts to the Korean government’s restructuring scheme. First, companies in liquidity crunch will be provided with sufficient financial support by the government. Second, companies with signs of insolvency will be put to the restructuring process. Third, nonviable companies will be drastically restructured and liquidated.

According to the Korean government’s principle of pursuing market-friendly restructuring led by creditor financial institutions, the Creditor Financial Institutions Committee, consisting of main creditor banks, is convened to decide on the restructuring plan. And to ensure efficient restructuring, the Creditor Financial Institution Mediation Committee created under the Corporate Restructuring PromotionAct has been improved to grant the role of mediating disputes in the Creditor Financial Institutions
Committee, and the Corporate Financial Restructuring Support Team was installed within the FSC. The Corporate Financial Restructuring Support Team has the role of supporting corporate restructurings and coordinating inter-ministerial consultations.

Based on the systems and principles mentioned earlier, the Korean government is currently pursuing restructuring of the construction industry and the shipbuilding industry, whose exposure to risks has recently been highlighted.

First of all, credit risk evaluation will be conducted for all construction companies and shipbuilding companies led by their main creditor banks. And based on the result, restructuring of individual companies will be pursued. (The credit risk evaluation result is scheduled to be released on Jan. 22)

The first round of credit risk evaluation has been conducted for top 92 construction companies in terms of productivity and 20 exporting SME shipbuilders, and they are to be rated in four grades of Normal (A), Temporary liquidity squeeze (B), Signs of insolvency (C) and Insolvent (D). For B-grade companies, the government is going to provide financial support to help them overcome the liquidity crunch and induce them to prepare self-survival plans as part of post management. For C-grade companies, the government will supply liquidity and make them sign an MOU for management normalization under the Corporate Restructuring PromotionAct. D-grade companies will not receive any new funding from the government and the companies themselves will have to go through the legal proceedings.

After completing the first evaluation, the second round of evaluation will start from February addressing problems found in the first evaluation.

Lastly, the Korean government has a measure in place to secure soundness of the banking sector.

Between November and December of last year, Korean banks pursued recapitalization measures of their own and raised 16 trillion won. The government plans to raise the BIS ratio of local banks from 10.86 percent in September last year to 12 percent-level by January this year. (The BIS ratio at the end of 2008 is estimated at upper-11 percent.)

To add to banks’self-efforts, the government is pursuing recapitalization via creation of a bank recapitalization fund amounting to 20 trillion won. The fund will raise 10 trillion won from the BOK, 8 trillion won from institutional and individual investors and 2 trillion won from KDB, and it will purchase redeemable preferred stocks, hybrid bonds and subordinated bonds to support the banking sector. This is expected to increase banks’ BIS ratio by about 2.6 percent.

Such a measure is designed to counter possible deterioration in local banks’capital position, and it will be effective in preventing the risk of default in Korea’s banking sector. The government also has a contingency plan to stabilize the financial system with an injection of public funds when needed, and has accumulated enough financial resources to support this plan.

* Please refer to the attached PDF for details.