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October 2008

The Korean Economy: Resilience Amid Turbulence. October 2008. Macroeconomic Performance 2. Current Issues & Answers. Stable GDP Growth and Downward Trend in Inflation. Average GDP Growth Rate in 1H08. Korea show s robust GDP growth. Downward trend in consumer prices.

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October 2008

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  1. The Korean Economy:Resilience AmidTurbulence October 2008

  2. Macroeconomic Performance2. Current Issues & Answers

  3. Stable GDP Growth and Downward Trend in Inflation Average GDP Growth Rate in 1H08 Korea shows robust GDP growth Downward trend in consumer prices 2008 CPI – Headline (%) & WTI trend (US$) Average GDP Growth Rate in 2006-2007 3

  4. Improving Current Account Surplus Diversified export products Robust export growth Exports (US$ bn, YoY Growth, %) 400 300 371 200 325 330 284 254 14.1% 194 14.4% 162 23.0% 11.8% 100 30.9% 19.8% 8.0% 0 2002 2003 2004 2005 2006 2007 Sep.08 Export (USD billion) Source: Bank of Korea Diversified export markets Current account balance would turn to surplus in 4Q 2008 2008 Current account balance (US$ bn) Others 19.8% China 22.1% 3.5 ~ 4.0(e) Middle East 5.3% Central &South America 6.9% EU 15.1% Japan 7.1% -8.5~-9.0(e) North America 13.3% ASEAN 10.4% Source: KITA, as of 2007 4

  5. Much Room for Monetary and Fiscal Policy Much room for monetary and fiscal policy Simultaneous policy rate reduction by 7 countries Korea policy rate trend (%) Policy rate (October 8, 2008) △0.25% 5.0% Source: Bank of Korea, Datastream 5

  6. Prudent Fiscal Position Korea continues to produce fiscal surpluses Lower debt level than OECD peers Consolidated government balance (% of GDP) Government net debt to GDP (%) Source: Ministry of Strategy and Finance OECD Average: 77% Surplus well above its peers Government surplus (% of GDP) Source: S&P Sovereign Risk Indicator, July 2008, 2008 forecast data Source: OECD; IMF (Korea data). According to OECD, Korea’s debt to GDP ratio is 26.5% 6

  7. Macroeconomic Performance2. Current Issues & Answers

  8. Korea’s External Debt Level is Too High? Large portion of external debt comes from currency hedging by banks and exporters $144.7bn (34.5% of total) without default risk Most of short-term external debt by foreign bank External debt structure (US$ bn) Total external debt by bank (US$ bn) Domestic bank No risk Foreign bank branch Short-term external debt by bank Domestic bank Foreign bank branch Source: Bank of Korea Source: Bank of Korea 8

  9. Korea’s Foreign Reserves are not liquid? Korea has 6th largest foreign reservesworldwideand most of the foreign reservesarehighly liquid Adequate amount of foreignreserves Highly liquid foreign reserves FX reserves (US$ bn) Total reserves (US$ bn) Mostly AA-rated or above bonds217.2 (90.6%) 6th largest reserves globally (August 2008) FX reserves (US$ bn) 1,808 Deposit22.0 (9.2%) Others 0.5 (0.2%) Median of peers1: US$ 29.2bn Source: Bank of Korea 1 Includes Hong Kong (AA+), Slovenia (AA), Portugal (AA-), Italy (A+), Chile (A+), Czech Republic (A) and Estonia (A). Credit ratings by S&P. Source: IMF. 9

  10. Korean Banks Have a Serious Liquidity Problem? Supported by government’s consistent and strict management,currency mismatch and duration mismatch have been minimized No currency mismatch exists High liquidity ratio: Low risk from duration mismatch 7-day maturity mismatch ratio (%) Foreign currency financing/operation - Korean banks (US$ bn, as of Jun.08) 7-day Guidance: 0% 3-month foreign currency liquidity rate (%) Guidance: 85% 1) NPL : 0.3%, 2) Estimates (not included in liabilities)

  11. Loan to Deposit Ratio is Too High? Loan to deposit ratio has stayed low during recent years Moderate loan to deposit ratio Loan to deposit ratio (%) * US : 112%(Including CD, Jul 2008) Source: Financial Supervisory Service 11

  12. Real Estate Bubble will burst? Government’s strict DTI and LTV regulation has enhanced household finance soundness Improving loan to value ratio Dramatic growth of financial assets 1 2 LTV ratio (%) Financial surplus (KRW trn) Stricter regulationonmortgage than other countries Source: Bank of Korea Financial Stability Report, April 2008 1 Financial Surplus = Financial Asset Increase - Financial Liability Increase. 2 Financial assets and liabilities exclude trade credits and other miscellaneous non-interest-bearing financial assets and debts.

  13. Government Plan to Stabilize Financial Market Two of the five financial stabilization measureswould be sufficientin current condition Should the need for additional steps arise, appropriate measure will be enforced 13

  14. Korea: The Case for Investment • Stable GDP Growth Amidst Global Downturn • Downward Trend in Inflation • Improving Current Account Surplus • Prudent Fiscal Position Strong Fundamentals • Reasonable Amount of External Debt • Sufficient Foreign Exchange Reserves • Manageable Situation in Real Estate Sector Stable Liquidity • Providing dollar liquidity to banks • Government guarantees for Korean banks’ external debt • More proactive measures prepared Governmental Measure 14

  15. Korean Economy: Positive Power Drives Experience in Asian Financial Crisis Successfully Overcame Oil Shock More than 5000-year History • Tax cuts • Regulatory reforms • Global standards in financial sector In history, Korea has proven its power to change crisis into opportunity Trust in Korean Economy. Positive Power Drives It

  16. Thank You

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