For more information, see Republic of Korea and the IMF

The following item is a Letter of Intent of the government of Korea, which describes the policies that Korea intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Korea, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Seoul, Korea
March 10, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

1.  Under the strong leadership of President Kim Dae-jung, Korea has made significant progress since entering into a standby arrangement with the IMF in December 1997 to cope with the foreign exchange crisis. Following the successful conclusion of the short-term debt rollover negotiations with creditor banks a year ago, the external position has substantially strengthened and important steps have been taken to restructure the economy. Usable reserves have risen to US$50 billion, and bolstered by the stability in the foreign exchange market, Korea has been making SRF repurchases on schedule.

2.  The domestic economy has begun to recover. Through fiscal stimulus and progressive reductions in interest rates, the Government has been able to support economic activity and facilitate the recovery. Progress with structural reforms in the financial and corporate sectors has boosted confidence and laid the foundation for the resumption of sustained growth. Improved international sentiment has been reflected in the recent decisions by the international ratings agencies to upgrade Korea's sovereign risk to investment grade.

3.  The Government has continued its efforts to consolidate and recapitalize the banking system, paving the way for the resumption of lending. At the end of last year, a Memorandum of Understanding was signed to sell a majority share in Korea First Bank to a U.S.-based consortium. A similar deal for Seoul Bank is near conclusion. The integration and coordination of the supervision and prudential regulation of the financial sector has been furthered by the formation of the Financial Supervisory Service on January 1, 1999.

4.  The first round of corporate sector restructuring was completed in December 1998. The top five chaebol and their creditor banks have formulated Capital Structure Improvement Plans that focus on corporate work-outs and the swap of affiliates between groups. Important progress has been made in restructuring the top 6-64 chaebol under the debt workout framework established in conjunction with the World Bank.

5.  Public sector reform has been advanced through privatizing and restructuring public enterprises and downsizing government bodies. Labor market flexibility has been enhanced through the Tripartite Accord between labor, business, and government. The Government is committed to structural reforms across all sectors of the economy.

6.  The macroeconomic policy priority in 1999 is to foster the recovery. In light of the slowing world economy, the government intends to reinforce the emerging recovery in domestic demand through fiscal stimulus: a consolidated central government deficit of 5 percent of GDP has been budgeted for 1999, with three quarters of the public investment budget to be spent in the first half of the year. Continued flexible monetary policy, and the interest rate reductions that commenced in mid-1998, should also support the economic upturn. To meet the challenges of unemployment, an inevitable byproduct of the process of restructuring, comprehensive efforts are being made to ensure the adequacy of the social safety net, thereby reinforcing social stability.

7.  The attached Memorandum on Economic Policies for the Fifth Quarterly Review outlines the major policies for the coming months and updates the Memorandum on the Economic Program of November 13, 1998. The Government remains committed to the ongoing structural reforms, the successful completion of which will enable Korea to recover its growth potential. After the severe downturn experienced in 1998, positive GDP growth is projected for 1999.

8.  Consistent with the significant progress made in stabilizing and restructuring the economy, future reviews of the stand-by arrangement with the IMF will take place semi-annually.

Chol-Hwan Chon
Bank of Korea
Kyu-sung Lee
Minister of Finance and Economy


Korea: Memorandum on Economic Policies

  Macroeconomic Policies

Economic policies aim to:
• sustain recent improvements in confidence and support the emerging recovery of domestic demand;
• further advance financial sector and corporate restructuring so as to strengthen the foundation for the resumption of sustained growth;
• ensure that the social safety net is adequately mitigating the hardship of the unemployed.

  Macroeconomic projections for 1999 are:
• GDP growth of 2 percent, with the prospects of a higher rate depending critically on continued improvements in domestic confidence, as well as the external environment;
• inflation being contained to around 3 percent;
• the current account surplus to narrow significantly but remain substantial.

Monetary and exchange rate policy • Interest rate policy will continue to be conducted in a flexible manner with upward and downward adjustments as necessary.
• Interest rates which have been reduced significantly to support the recovery, may continue to be lowered if this is consistent with achievement of the inflation target and providing that the external position remains strong.
• Broad money (M3) growth is expected to remain at 13–14 percent in 1999.
• Usable reserves, which reached US$48.5 billion at end-1998, are expected to rise further in 1999.
• Exchange rate policy will remain flexible and BOK intervention will be limited to smoothing operations consistent with achieving the reserve target.

BOK foreign exchange window • The BOK foreign exchange window was closed effective May 15, 1998 and schedules to repay emergency support have been agreed with banks; of the US$3.6 billion in emergency loans outstanding at end-1998, US$2.2 billion will be repaid by end-June 1999.

Fiscal outturn in 1998 • Budgetary spending was accelerated in the fourth quarter of 1998 in order to provide support for economic activity. Social safety net outlays were increased as planned, but other expenditures, including interest costs, were lower than expected, resulting in an estimated fiscal deficit of about 4 percent of GDP in 1998 (compared to a target of 5 percent of GDP).

Fiscal policy in 1999 Fiscal policy in 1999 aims at providing a continued stimulus to the real economy in conjunction with a further strengthening of the social safety net. To this end, the 1999 budget aims at a fiscal deficit of 5 percent of GDP:
• Revenues are projected to increase by about 1 percentage point of GDP in 1999, due in large part to higher nontax revenue (including privatization receipts). The VAT base has been further broadened (to include cigarettes and professional services), while the tax rate on real estate capital gains has been reduced by 10 percentage points.
• Expenditures are budgeted to increase by about 2 percentage points of GDP in 1999 reflecting a sharp increase in interest payments (including the carrying costs for financial sector restructuring), as well as higher expenditures related to the social safety net.
• Budgetary expenditures will be front loaded in the first half of 1999 so as to help sustain the emerging recovery.
If the recovery turns out to be stronger than expected, the deficit will be allowed to decline below target through the operations of the automatic stabilizers.

Social safety net With unemployment at a record high of 8 percent, the social safety net will be further strengthened in 1999 through an expansion of existing programs.
• Direct social safety net outlays are projected to increase by at least a third in 1999 (to 1 percent of GDP):
    • The budgetary allocation for public works programs has been increased so as to employ a larger number of the unemployed.
    • Outlays for temporary livelihood protection and a cost of living subsidy will be more than doubled; these programs are expected to reach about 570,000 individuals.
    • The unemployment rate has remained above 6 percent, thereby triggering a 60-day increase in the maximum duration of unemployment benefits. This extension will remain in effect until June 1999.
    • Effective April 1, 1999, unemployment benefits will become available to workers in firms with less than five employees and to part-time and temporary workers. As a result, unemployment insurance eligibility will rise to 70 percent of wage workers compared to 35 percent before the crisis. It is expected that 530,000 individuals will receive benefits in 1999.
    • Outlays for job training will amount to W 0.8 trillion in 1999, covering training for 320,000 individuals.
• The government will continue to regularly assess the adequacy of the social safety net in light of developments in unemployment and the incidence of poverty, and provide additional resources as necessary.

Medium-term fiscal program The government's broad medium-term fiscal objectives are to achieve a balanced fiscal position by 2006 and a declining trend in the ratio of debt to GDP. The government will regularly update its medium-term fiscal plan and will seek the views of the Fund in the process.

Temporary assistance to
credit-constrained enterprises

• Trade financing of US$3.3 billion is being provided on commercial terms to small- and medium-sized enterprises, and larger enterprises not affiliated with the top five chaebol, for maturities of up to one year, comprising:
    • US$3 billion for import financing, of which: US$1 billion has been financed through the World Bank's SAL, and a further US$2 billion will be provided if necessary from reserves in excess of program targets. Of the latter, at least US$1 billion will be reserved for small- and medium-sized enterprises;
    • US$0.3 billion in BOK rediscount of export bills for small- and medium-sized enterprises.
    Of the original provision for these schemes, US$0.4 billion remained unutilized at end-1998.
• The guarantee ceiling of Credit Guarantee Funds for small- and medium-sized enterprises has been raised by a further W24 trillion through an injection of W1.2 trillion from the 1999 budget.


The government is proceeding with its plans to privatize 11 state-owned enterprises and their subsidiaries. The National Textbook Company, Korea Technology Banking Corporation, and Namhae Chemical Corporation have been privatized. The recent sale of a 5.8 percent share in POSCO has reduced public ownership to 20.8 percent. Korea Heavy Industries will be offered for sale in early 1999 and Korea General Chemicals will be offered for sale later in the year.

  Full privatization of four other state-owned enterprises (Korea Ginseng and Tobacco, Korea Gas, Daehan Oil Pipeline, Korea District Heating) will occur in phases over the next four years. In addition, the government will offer for sale a 5 percent share in KEPCO in the first half of 1999. Korea Telecom has been publicly listed and the government will reduce its share in the company to 33.4 percent by 2000.

Financial Sector Restructuring1
Type of measure Measure Timing
Undercapitalized commercial banks The FSC will monitor all banks identified to be undercapitalized under the FSC capital adequacy review and CAMEL analysis to ensure:
• a sufficient initial increase in capital to make the attainment of minimum capital requirements feasible and credible by end-March 1999 for Cho Hung, KEB, and Chungbuk; and by end-April 1999 for Peace Bank.
• adherence to a clear timetable for achieving specific performance objectives including: (i) improvements in capital ratios to 6 percent by March 1999, and to 8  percent by March 2000; banks will be encouraged to increase their capital ratios further to 10 percent by December 2000; (ii) improvements in operating performance to enhance risk management and profitability, and (iii) continuing identification and resolution of nonperforming loans;
• for regional banks that do not engage in international business and nationwide banks that do not lend in amounts above W5 billion to an individual corporate borrower and that do not engage in international business, the timetable for improvements in capital ratios will be 4 percent by March 1999, 6 percent by March 2000, and 8 percent by December 2000;
• submission and adherence to a clear timetable for progressive cost reductions;
• further capital increases on account of: (i) supervisory examinations (including diagnostic reviews as necessary) leading to a reclassification of assets; (ii) any further deterioration in asset quality; (iii) the strengthening of supervisory rules and procedures (including the application of the forthcoming new loan classification guidelines);
• an objective assessment is made of progress in meeting the terms of the implementation plans, using outside expertise as necessary.


  When approved implementation plans are not fulfilled, banks will be subjected to corrective actions by the FSC, including Prompt Corrective Action (PCA) procedures.


Provision of information The FSC will provide to the Fund all the relevant information, including the results of diagnostic reviews and information on MOUs, as necessary for monitoring the restructuring of the financial system.


Government-owned commercial banks Plans will be prepared for the sale of the government shares in commercial banks and for the divestiture of the BOK's shares in commercial banks.

June 30, 1999

  • While under government ownership, the banks will be operated on a fully commercial basis and the government will not be involved in the day-to-day management. Ongoing
  • The chief executive officer will be a well-qualified professional. The nonexecutive directors of the banks shall not be public servants, or members of any branch of government. Within 90 days of the government becoming a major shareholder
  • Reach agreement in principle by signing MOUs for the sale of majority shareholdings in Korea First Bank and Seoul Bank to strategic investors with sufficient capital and expertise to manage these banks.

March 15, 1999

All commercial banks The FSC will continue to monitor the capital ratios, CAMELS, and CAEL ratings of all commercial banks in order to provide an early indication of problems. If the capital adequacy ratio of a bank which had been above 8 percent falls below that level subsequently, the FSC will invoke the PCA procedures. Similarly, if the CAMELS or CAEL ratings of a bank become 3 or worse, the FSC will adopt appropriate supervisory actions, including the PCA procedures. For the banks shown to be undercapitalized in light of the diagnostic reviews, the FSC will strengthen supervision and provide administrative guidance to encourage mergers or recapitalization from private sources.


  Banks will be required to increase capital on account of:

    (i) supervisory examinations (including diagnostic reviews as necessary) leading to a reclassification of assets;
    (ii) any further deterioration in asset quality; and
    (iii) the strengthening of supervisory rules and procedures (including the forthcoming new loan classification guidelines).


  Every effort will be made for banks to hire well-qualified bank managers, in particular those with international experience.


Use of public funds for financial sector restructuring The government will ensure that sufficient public funds are allocated for the purpose of financial restructuring.



Public funds should only be used to the extent necessary to facilitate the liquidation of failed institutions and the restructuring of weak but viable banks. Determination of viability by the FSC (using outside expertise as necessary) will be a precondition for the use of public funds. In addition, restructuring which involves the use of public funds should be limited to:
• private sector recapitalization and mergers approved by the FSC, where there is adequate burden sharing, which would be expected to involve contributions of capital from existing or new shareholders, and/or other stakeholders; or
• purchase and assumption (P&A) transactions; or
• direct recapitalization by the government with full write down of shareholder capital and replacement of management, in exceptional cases and where a bank is of systemic importance.


  Government and KDIC funds can only be used, either to inject capital directly (including contributions to cover the deficiency in net worth in P&A transactions) or to purchase impaired assets through KAMCO.



In order to enhance the incentives for banks to participate fully in the corporate restructuring process, no public funds, whether by way of KAMCO purchases or capital injections or other means, shall be made available to banks which are not certified by the FSC to be performing their role in the corporate sector restructuring process. In addition, no public funds will be made available to any bank that is not in compliance with the timetable on the reduction of large exposure limits set out below. Exceptions will be made, in consultation with the Fund, only in emergency cases or when public support is required to complete a merger or P&A transaction.



• The bulk of asset purchases by KAMCO should be from commercial banks and other financial institutions where there is a deposit guarantee. In exceptional cases, asset purchase may be made from other institutions if failure of these institutions poses a systemic risk. Any such purchases would be made in the context of a comprehensive restructuring plan for the relevant sector. In order to minimize its borrowing requirement, KAMCO will accelerate the sale of its assets. Ongoing

• Purchases should be at prices that reflect actual and expected recovery rates as well as funding costs, and nominal prices for unsecured loans.
• KAMCO's performance, in particular as regards asset acquisition and recovery, will be subject to a half- yearly audit to international standards by a firm with international experience in auditing this type of agency and in the valuation of impaired assets. The results of the reviews and any qualifications will be published. Any losses identified will be reflected in KAMCO's audited financial statements.
  • KAMCO will publish its first audited accounts.

April 30, 1999


Capital subscriptions by the government, KDIC or any other government agency involved in financial sector restructuring should be on terms that provide the authorities with a share in any improvement in profitability and give the authorities powers, e.g., by the exercise of conversion rights, to take control in the event of a deterioration.


Nonbank financial institutions • The FSC will complete the evaluation of the adequacy and consistency (with regulations for commercial banks) of prudential regulations for the nonbank financial institutions (merchant banks, investment trust companies, securities companies, insurance firms, credit cooperatives, mutual saving, credit unions, and leasing companies). June 30, 1999
  • Based on this evaluation, regulations will be revised to bring them into compliance with international best practice taking into account their specific characteristics, but ensuring that similar risks are treated consistently across institutions. September 30, 1999
Merchant banks Merchant banks will be required to adopt the same accounting standards, based on U.S. GAAP, as commercial banks with effect from the year beginning April 1, 1999. From June 2000, the loan classification, provisioning rules, and capital adequacy computation rules used for commercial banks at that time will be introduced, after which merchant banks will be subject to prudential regulations that are consistent with those for commercial banks. April 1, 1999
  Merchant banks should maintain ratios of 6 percent at March 31, 1999 and reach 8 percent by June 30, 1999. However, those merchant banks whose CAR falls below these targets because of realized losses associated with corporate restructuring agreements completed by June 30, 1999, will be treated as follows: March 31, 1999

  • First, those that maintain a CAR above 2 percent, but can reach the 6 and 8 percent targets when losses on corporate restructuring agreements are deferred in calculating regulatory capital, will be required to submit a rehabilitation plan, acceptable to the FSC, to write off these losses in equal quarterly installments over the period ending March 31, 2002. These banks will be debarred from international business, and subject to restrictions on asset growth and new business. Ongoing

  • Second, those with negative equity will be subject to closure. This will involve immediate suspension followed by a diagnostic assessment of their net worth by a qualified accounting firm to be concluded within two months. If the bank is confirmed to be insolvent and cannot be recapitalized within 30 days, it will be closed forthwith.
• Third, all those merchant banks which do not fall under the two previous categories will be subject to PCA.
All merchant banks will be encouraged to move progressively beyond the minimum 8 percent after June 1999.

Insurance companies • The FSC will extend relevant banking regulations to insurance companies, in the areas of loan classification, provisioning, large exposure, connected lending and disclosure rules. The FSC will introduce ceilings on insurance companies' total lending and stock holdings. The FSC will also strengthen its prompt corrective action framework. March 31, 1999
  • The FSC will introduce the EU solvency margin standard. All life insurance companies will be required to gradually meet a solvency margin of 4 percent of policy reserves plus 0.3 percent of sum at risk as defined by FSC, and also according to a timetable set by the FSC. The timetable will specify attainment of a positive solvency margin by September 30, 1999. March 31, 1999
  • Insurance companies which fail to meet the required solvency margin thresholds will be required to submit recapitalization plans. If the plans are approved by the FSC, the FSC will closely monitor the progress on the implementation of these plans. If the plans are rejected, these companies will be subject to closure, merger, or sale, with the equity of existing shareholders written down to reflect the value of the companies.
July 31, 1999
  The FSC will announce plans to liberalize the regulations and controls on the terms and pricing and expense ratio of insurance contracts.

March 31, 1999

Securities companies The FSC will issue regulations requiring all securities companies to fully segregate clients' funds from proprietary accounts.

June 30, 1999

Investment trust companies • The FSC will require investment trust companies to reduce their outstanding bridge loans by 35 percent by March 31, 1999. March 31, 1999
  • The FSC will announce a plan to eliminate ITCs' remaining bridge loans. The plan will include an additional reduction of 20 percent by March 31, 2000. Those ITCs which fail to reduce their outstanding bridge loans according to schedule will be subject to appropriate supervisory measures determined by the FSC. March 31, 1999
  • External audits of ITCs' investment funds will be carried out at the end of each financial year. Every quarter, funds totaling at least 20 percent of total value of all funds whose financial year closed the previous quarter, will be audited, starting October 1, 1999. The audited accounts will be made available to fund investors. October 1, 1999 (Ongoing)
  • Investment trust companies will be required to mark all funds to market. July 1, 2000

1These measures have been formulated in close collaboration with both the IMF and the World Bank.

Prudential regulations and supervision
Type of measure Measure Timing
Financial Supervisory Commission Consistent with the Basle Committee's 25 core principles for effective banking supervision, the independence of FSC will be enhanced by ensuring that FSC has the necessary authority and responsibility to maintain the soundness of financial institutions. In this context, a comprehensive management review of government organization is underway and a preliminary report will be available in February 1999. Further significant progress will be made around March 1999 in order to clarify, inter alia, responsibilities and modes of cooperation in this area.

March 1999

Prudential regulations for commercial and specialized and development banks The FSC is updating its regulations to bring them closer to international best practice as expressed in the Basle Committee's Core Principles.  
  The FSC will ensure that the classification and provisioning of restructured assets is done on a prudent basis, reflecting the need for restructuring and any doubts that remain about the ability of the borrower to perform under the agreement. This will be taken care of in the new, forward looking approach under preparation (see below). In the interim, the FSC will issue guidelines by May 15, 1999 to ensure that, effective July 1, 1999:  
  • Restructured loans require provisions in the range of 2-20 percent. That is, such loans would be treated, at best, as "precautionary," with prompt reclassification to "substandard" or below on evidence that the borrower cannot perform fully its obligations under the restructuring agreement. Any interest accumulated under the agreement will only be included as income when paid. July 1, 1999
  • Equity and convertible debt issued in exchange for debt will be valued conservatively, taking into account any restrictions on sale and marketability. July 1, 1999
  Forthcoming changes include:
• For capital adequacy purposes, assets in all trust accounts with guarantees will be weighted at 100 percent.
January 1, 2000
  • Introduction of restrictive rules to be applied to all trust accounts ensuring segregation for management as well as accounting purposes. January 1, 2000
  In addition, future changes will include:
• preparation, in consultation with the Fund, of revised definitions of loan classifications so as to fully reflect capacity to repay and not solely past performance.
June 30, 1999
  • Financial Supervisory Service (FSS) examiners will ensure banks classify loans according to the new definitions on a trial basis. July 1, 1999
  • Audited financial statements will be required to reflect new definitions. December 31, 1999

Prudential rules for foreign exchange liquidity and exposures Compliance with existing guidelines that require commercial banks to have:
• short term assets (less than 3 months) of at least 70 percent of short term liabilities;
• long term borrowing (more than 3 years) in excess of 50 percent of long-term assets.


  Merchant banks to have short-term assets in excess of 60 percent by end June 1999, and 70 percent by end-December 1999. Long-term borrowing will exceed 40 percent of long-term assets by end-June 1999 and 50 percent by end-December 1999.

December 31, 1999 (full compliance)

  Implement requirements for merchant banks to:
• Maintain internal liquidity control systems based on a maturity ladder approach;
• Report maturity mismatches for sight to 7 days; 7 days to 1 month; 1 to 3 months; 3 to 6 months; 6 months to 1 year; and over 1 year.
• Maintain positive mismatches for the first period. From sight to 1 month, any negative mismatch should not exceed 10 percent of total foreign currency assets;
• Publicly disclose statistics on foreign currency liquidity;
July 1, 1999
  The FSC will monitor implementation of internal liquidity controls on a monthly basis for both merchant and commercial banks. Ongoing
Specialized and development banks Issue regulations to extend, effective March 15, 1999, prudential rules applied to commercial banks to specialized and development banks taking into account the specific characteristics of these institutions.

February 15, 1999

  Establish systems for reporting to the FSC on the same basis as commercial banks.

March 15, 1999

  Start implementing the recommendations of the diagnostic reviews that were carried out in 1998.
These banks should:
• mark security holdings to current market value beginning end-March 1999;
• appraise the value of collateral at least once a year beginning end-March 1999;
• publish accounts of these banks on a fully consolidated basis beginning with the financial year ending December 1999. These accounts should be externally audited by recognized accounting firms; and
• improve risk management including:
    (i) systems to better evaluate credit risk, manage and administer loans, and limit credit exposure;
    (ii) systems to monitor and control risk (this would include interest rate, credit, market, and operational risk) on a bank-wide basis; and
    (iii) systems to evaluate compliance with established guidelines for risk management and internal audits.

March 31, 1999

  • Ensure appropriate arrangements are in place for the FSC to conduct examinations and carry out prudential supervision of KDB, KEXIM Bank, and IBK. In this regard, the MOFE will delegate examining authority to the FSC. A first examination of KDB will be completed at latest by March 31, 1999. March 31, 1999
  • As a result of such examinations, FSC will make recommendations to the MOFE as to any remedial action required, including increases in capital, and develop plans for rigorous supervisory strategies (including regular monitoring and off-site and on-site reviews). May 15, 1999
  • The FSC will start prudential supervision of the National Agricultural Cooperatives, National Fisheries Cooperatives, and National Livestock Cooperatives. April 1, 1999
Connected lending The limit of 25 percent of equity capital for lending to large shareholders and their affiliates, and other restrictions on connected lending, that apply to commercial banks will be applied to merchant banks. The excess over the 25 percent limit at end-December 1998 will be progressively reduced by 20 percent by May 1, 1999, an additional 40 percent by January 1, 2000, and eliminated by January 1, 2001.


  The FSC will review the provisions on connected lending in the General Banking Law with a view to bringing them into line with international best practice.

December 31, 1999

  All connected lending, and the terms on which it is provided, will be audited and disclosed in the 1998 and subsequent annual financial statements.

Early 1999

Large exposures For commercial banks, the General Banking Law has been amended to redefine single borrower and group exposure limits, inter alia to include all off-balance sheet exposures.
• From January 2000, both limits will be reduced from 45 percent to 25 percent of total capital, using the new definition. The exposure to each borrower or group of borrowers in excess of 45 percent outstanding at end-June 1998 will be reduced by 50 percent by end-June 1999, and eliminated by end-December 1999.
• Exposures in excess of 25 percent at end-December 1999 will be subject to progressive reduction over the following three years, that is, one third of the excess over 25 percent will be reduced by end-December 2000, two-thirds of the excess by end-December 2001 and the remaining excess eliminated by end-December 2002.
• In addition the authorities will limit the aggregate of exposures (with the new definition) in excess of 10 percent of total capital to 500 percent of capital by end-March 2000.
• Banks with aggregate large exposures in excess of this limit as of March 31, 1999 will be set interim benchmarks of 800 percent by end-June 1999, 700 by end-September 1999, and 600 percent by end-December 1999.


  For merchant banks:
• The current limit of 100 percent will be reduced to 25 percent as of end-June 2000. Exposures to borrowers or groups of borrowers in excess of 45 percent at end-June 1998, will be reduced by 40 percent by end-June 1999, and eliminated by end-June 2000.
• Exposures in excess of 25 percent as of end-June 2000 will be subject to progressive reduction over the following three years, that is one third of the excess over 25 percent will be reduced by end-June 2001, and two thirds by end-June 2002, with the excess eliminated by end-June 2003.
• The aggregate of exposures in excess of 10 percent of total capital will be limited to 600 percent of total capital by end-June 1999 and to 500 percent of total capital by end-June 2000.


  For specialized and development banks the same single borrower, group exposure and aggregate large exposure rules as for commercial banks will apply, with the following provisos:
• For Korea Development Bank, no new single and group exposures in excess of 25 percent will be incurred after end-March 1999. Exposures in excess of 25 percent of capital outstanding at the end of March 1999 will be reduced by at least 15 percent in each year and will be eliminated by end-December 2004. In addition, KDB will reduce the aggregate of exposures in excess of 10 percent of capital to 600 percent by end-December 1999 and to 500 percent of capital by end-2000;
• For the Export-Import Bank of Korea, the rule applying to commercial banks will apply taking account of the specific characteristics of that bank, whereby the concentration of risk is reduced by the reliance on independent security, such as receivables or guarantees from third parties duly taking into account conservatively assessed value of such security.


  The aggregate excess exposure of each commercial, merchant, and specialized and development bank will be published quarterly as from end-March 1999.

From May 1999

Cross guarantees The FSC has established internal interim bench-marks to monitor progress toward the elimination of cross guarantees covered by the provisions in Article 10(2) of the Fair Trade Act by end-March 2000. As a part of the efforts to eliminate cross-guarantees, the top five chaebol have eliminated all inter sub-industry group cross-guarantees. The remaining cross-guarantees within sub-industry groups will be eliminated by March 2000.

Completed by March 31, 2000

Disclosure, auditing, and
accounting standards
The MOFE, the FSC and KICPA and the relevant regulatory bodies should continue to improve disclosure, auditing, and accounting standards. Further steps involve: 
• Reviewing regulation of the auditing profession to ensure that auditing standards reflect international auditing standards issued by the IFAC. March 1999
• Introducing regulations that will ensure that accounting and disclosure standards for merchant banks and investment trust companies are based on Korean accounting standards that are fully consistent with U.S. GAAP. April 1, 1999
• Improving reporting requirements for banks, in order to strengthen the ability of supervisors to be forewarned of potential problems. In particular, losses incurred by banks including in debt restructuring must be recognized at the time of restructuring. Ongoing
Credit rollovers No further directives will be given to banks to rollover credits to customers including small to medium sized enterprises: banks should be allowed to make lending decisions on a commercial basis.


Public guarantee funds Beginning July 1, 1999, at least 20 percent of the new guarantees, including rollovers, issued by Korea Credit Guarantee Fund and Korea Technology Guarantee Fund will cover only 80-90  percent of the value of guaranteed obligations depending on the credit rating of the firm. This trend toward providing only partial guarantees will continue such that by end-2000 all new guarantees issued will cover only 60-90 percent of the value of guaranteed obligations.

July 1, 1999

  Corporate Restructuring1
Objectives Policies are aimed at:
• promoting better corporate governance practices by improving accounting, disclosure and auditing standards; liberalizing foreign investment; strengthening the role of the Board of Directors and minority shareholders;
• addressing the corporate debt overhang by establishing a framework for voluntary creditor-led corporate restructuring;
• strengthening the role of the Fair Trade Commission to enforce anti-trust laws; and
• strengthening the legal framework for creditors' rights by improving the insolvency system.

Top 6-64 chaebol • For the top 6-64 chaebol and other large corporations, an overall framework for creditors and debtors has been established for voluntary corporate restructuring under "London approach" principles.
• The objective is to help economically viable but distressed companies reform their business operations and management, and also financially restructure their liabilities to restore corporate financial health. After the workout, the company should be able to sustain the level of debt without requiring further debt restructuring.

  Based on experience gained so far, the workout process is being strengthened in the following areas:
• The deadlines and procedures are being reviewed to allow sufficient time for the due diligence process and a review by creditors of the workout plans.
• The scope and depth of due diligence process are being improved with the aim of enhancing the quality of the due diligence process and workout plans.
• Monitoring and enforcement of Memorandum of Understanding (MOU) are being strengthened with the aim that covenants are formally documented in the MOU to ensure a review if they are breached.

Top five chaebol The restructuring of the top five chaebol will be voluntary and commercially oriented. Capital structure improvement plans (CSIPs) have been submitted to creditor banks. These plans include the Big Deals, which involve asset swaps and joint ventures among the top five. The CSIPs will be implemented during 1999 and 2000. They will be monitored closely to enforce compliance and ensure:
• adequate burden sharing between banks and the top five chaebol to not unduly undermine banks' financial soundness and that the top five chaebol:
• improve their corporate governance system;
• introduce consolidated financial statements;
• identify core businesses and spin-offs of non-core affiliates;
• reduce indebtedness;
• eliminate cross guarantees; and
• attract direct foreign investment.

1Measures in the area of corporate restructuring have been formulated in consultation with the World Bank and are supported by the Bank's Second Structural Adjustment Loan.

Trade and Capital Account Liberalization

Type of measure Measure Timing
Import liberalization Phase out Import Diversification Program (presently covering 16 items)
• Liberalization of remaining items.

June 1999

Services Submit revised financial services offer to the WTO consistent with OECD commitments.

Offer submitted January 19, 1999.

Foreign exchange liberalization Promulgate Presidential decrees to implement revised foreign exchange law enacted in September 1998 to accelerate liberalization of foreign exchange transactions. The law will become effective on April 1, 1999.

March 1999

Transparency, Monitoring, and Data Reporting

Type of measure Measure Timing
Fiscal data Starting with the 1999 fiscal program, the timeliness of the reporting of fiscal data is being significantly improved through the introduction of a computerized reporting system. Data on revenue, expenditure and financing of the consolidated central government are now being reported by various agencies. This data will be made available publicly on a monthly basis with no more than a four week lag.

As early as possible, but no later than mid-1999

Financial Sector Details of all public support for financial sector restructuring, including by KAMCO and KDIC, will be published on a regular basis.


Develop a set of indicators to monitor the soundness of the financial system, including regular reporting of such data to the IMF.


External Debt Continue developing the external debt reporting system to enhance debt management and monitoring.


Develop external vulnerability indicators as an "early warning system".


  Promulgate the necessary regulations to ensure compliance with reporting on external liabilities of the corporate sector.

March 1999

Foreign Reserves Data on usable reserves of the BOK are being published twice monthly (for 15th and the last day of each month) within five business days. Data on net forward position of the BOK is being published monthly. All of these data have been placed on the BOK Web site.




Structural Performance Criteria

December 31, 1998

1.  Obtain bids for Korea First Bank and Seoul Bank (by November 15, 1998). Memorandum of Understanding for the sale of Korea First Bank and Seoul Bank were signed with potential buyers on December 31, 1998 and February 22, 1999, respectively.

2.  Introduce consolidated foreign exchange exposure limits for banks, including their offshore branches (by November 15, 1998). Done.

March 31, 1999

1.  Complete audit of KAMCO to international standards by a firm with international experience in auditing this type of agency and reflect any losses identified in KAMCO's audited financial statements. Audit in progress; results expected to be available by April.

2.  The FSC to complete supervisory examination of the KDB and make recommendations to the MOFE, as needed, as to any remedial actions required. Examination in progress and expected to be completed by March 31, 1999; recommendations arising from the examination expected in May.

Period of April 1–August 31, 1999

1.  Issue regulation by April 1, 1999, requiring insurance companies that fail to meet the mandatory solvency margin thresholds (specified in the Memorandum on Economic Policies for the fifth review of the stand-by arrangement) to submit recapitalization plans by July 31, 1999.

2.  By June 1, 1999, begin publishing data on revenue, expenditure, and financing of the consolidated central government on a monthly basis with no more than a four-week lag.

3.  By June 30, 1999, issue new loan classification guidelines that fully reflect capacity to repay. These guidelines would also cover the treatment of restructured loans and the valuation of equity and convertible debt acquired as part of corporate restructuring.

4.  For merchant banks, implement prudential rules for foreign exchange liquidity and exposures based on a maturity ladder approach by July 1, 1999.

5.  Issue instructions, effective July 1, 1999, that at least 20 percent of the new guarantees issued by Korea Credit Guarantee Fund and Korea Technology Guarantee Fund will cover only 80-90 percent of the value of guaranteed obligations depending on the credit rating of the firm.


Monetary Sector
Outstanding Stock as of: Limit
(In billions of won)

Net domestic assets
    End-December 1998

       Performance criterion –7,770
   Actual1 –19,857

End-March 19992 –17,341

End-June 19992 –25,787

End-September 19992 –28,713
Broad money M33

End-September 1998 774,471 (13.9)

End-December 19984 794,496 (13.5)

End-March 19995 823,555 (13.5)

End-June 19996 844,227 (13.5)

End-September 19996 877,911 (13.4)

1With net foreign assets valued at program exchange rates.
2Performance criterion.
312-month growth rate in brackets.
4Estimate; at end-November (latest data available) M3 was W 789,649 billion (a 12-month growth rate of 12.6 percent).
5Revised projection.
Net domestic assets (NDA) is defined as the difference between reserve money and the won equivalent (converted at the program exchange rate) of net international reserves (NIR) as defined in the program. The NDA target will be adjusted down by the amount of any upward adjustment to the NIR target, made necessary by an increase in the net forward position over the end-December 1998 level.

M3 is defined as M2 plus deposits of other financial institutions, debentures issued, commercial bills sold, "deposits of credit unions," mutual credits of the National Federation of Fisheries, "Community Credit cooperatives," Mutual Savings and Finance Cooperatives situated in local and reserve life insurance company, certificates of deposit, repurchase agreements, and cover bills. M2 is defined as currency in circulation, plus deposit money (demand deposits at monetary institutions, time and savings deposits, and residents' foreign currency deposits at monetary institutions).

The ceiling on NDA will be increased (decreased) for any increase (decline) in required reserve ratios.


Net International Reserves of the Bank of Korea

(In billions of U.S. dollars)

End-December 1998

    Performance criterion 23.7

Actual 31.2
End-March 19991 31.8
End-June 19991 40.3
End-September 19991 43.7

1Performance criteria.
For monitoring purposes, net international reserves (NIR) of the Bank of Korea (BOK) is defined as the U.S. dollar value of gross foreign assets in foreign currencies minus gross foreign liabilities.

Gross foreign assets will include all foreign currency denominated claims, including monetary gold, holdings of SDRs, and the reserve position in the Fund. Excluded from gross foreign assets will be participation in international financial institutions, as well as holdings of nonconvertible currencies, claims on residents, and deposits of the BOK at overseas branches and subsidiaries of Korean banks. Gross foreign liabilities are all foreign currency denominated liabilities of contracted maturity up to and including one year plus the use of Fund credit. All assets and liabilities will be valued at program exchange rates.

The net forward position is defined as the difference between the face value of foreign currency denominated BOK off-balance sheet (forwards, swaps, options, and any futures market contracts) claims on nonresidents and foreign currency obligations to both residents and nonresidents.

The floor on NIR will be adjusted upward for any increase in the net forward position over the end-December 1998 position of US$1.5 billion (all of which are swaps).


Fiscal Sector

(In trillions of won)

Cumulative deficit from January 1, 1998
through December 30, 1998
Program1 21.3

Actual2 16.4
Cumulative deficit from January 1, 1999 to:

End-March 19991, 3 7.1

End-June 19991 12.9

End-September 19991 18.6

1Indicative ceiling.
2Preliminary estimate.
The consolidated central government overall deficit is defined as the consolidated balance of the central government (comprising the general account, the special accounts, and the special budgetary funds) and the public enterprises special accounts.

The consolidated central government overall deficit will be measured through the government treasury accounts. It is defined as the change in the central government's deposits and treasury cash with the BOK; plus the change in deposits with commercial banks and nonbank financial institutions; plus the change in central government bonds outstanding; plus foreign borrowing by the government.