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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.
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Seoul, Korea
November 13, 1998

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

1.  Almost a year has passed since Korea entered into a standby arrangement with the IMF to cope with the foreign exchange crisis. Faced with depleted foreign reserves, a rapidly depreciating currency and the risk of sovereign bankruptcy, it was inevitable to tighten monetary policy and raise interest rates last December to help stabilize the currency, along with the introduction of a rigorous reform program. Since that time, Korea has made significant progress in strengthening the external position and in advancing economic reform. Interest rates have fallen continuously in 1998, but remained above pre-crisis levels until mid-year due to instability in international financial markets. The exchange rate has stabilized in the range of W1300–1400 to the U.S. dollar, and usable foreign reserves have surpassed US$45 billion. The first round of financial sector restructuring was completed at the end of September, and important corporate sector restructuring steps will be taken by the end of this year.

2.  In the financial sector, 94 financial institutions, including five banks, have thus far either been closed or had their operations suspended. In an effort to stop the vicious cycle of deteriorating asset portfolios and the ensuing credit crunch, the government plans to mobilize fiscal resources totaling W 64 trillion won to support viable financial institutions, out of which W 38 trillion has already been provided for recapitalization and the disposal of nonperforming loans. This support has helped major banks to improve their capital adequacy ratios, setting the stage for a resumption of lending to the real sector that will help expedite economic recovery. Meanwhile, the banks have intensified their own rehabilitation efforts, including steps to reduce staff levels by 32 percent by the end of this year.

3.  Progress has also been made in corporate sector restructuring. A number of nonviable firms have been forced to exit, while the process of corporate workouts with creditor banks has begun for viable firms. Large business conglomerates are taking steps to reduce their debt leverage and improve their efficiency. Institutional standards for corporate governance, transparency, and accountability have been greatly improved. By the end of this year, the first phase of corporate restructuring will have been completed.

4.  This progress notwithstanding, the economic downturn has been more severe than expected. The government is attempting to stem further economic contraction through a combination of stimulative fiscal policy and accommodating monetary policy. The National Assembly approved the Supplementary Budget in September to allow the fiscal deficit to expand to around 5 percent of GDP in 1998. The draft budget for 1999 also incorporates a fiscal deficit of 5 percent of GDP with public investment spending to be concentrated in the first half of the year. The actual application of planned spending is being monitored on a weekly basis to make sure that fiscal stimulus takes effect in a timely manner. Monetary policy has also been eased. Call rates have declined well below pre-crisis levels, although lending rates have declined less rapidly.

5.  Although Korea has made significant gains in financial stabilization and structural reform, the current instability in international financial markets is limiting access to international capital. We are therefore undertaking various measures, including a further buildup of foreign reserves, to protect Korea from any potential external risks.

6. The attached Memorandum on the Economic Program for the Fourth Quarterly Review outlines the major policies for the coming months and updates the Memorandum on the Economic Program of July 24, 1998. Korea, under the strong leadership of President Kim Dae-Jung, remains committed to reform, and will continue to implement financial and corporate restructuring while pursuing flexible macroeconomic policies conducive to growth. The economy is expected to bottom out in 1999, with positive growth resuming during the year.

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



Structural Performance Criteria

March 31, 1998

1.  Complete second-round evaluation of the remaining 20 merchant banks and suspend operations of those banks which fail to pass the evaluation. Completed February 26, 1998.

2.  Allow foreign banks and brokerage houses to establish subsidiaries. Came into effect on March 31, 1998.

June 30, 1998

1.  Complete assessment of the recapitalization plans of commercial banks. Completed June 29, 1998.

2.  Establish a unit for bank restructuring under the FSC with adequate powers and resources to coordinate and monitor bank restructuring and the provision of public funds. Unit established on April 1, 1998.

September 30, 1998

1.  Submit legislation to allow for the creation of mutual funds (by August 31, 1998). Legislation submitted to the National Assembly on August 8, 1998.

2.  Require listed companies to publish half yearly financial statements prepared and reviewed by external auditors in accordance with international standards (by August 31, 1998). Done.

December 31, 1998

1.  Obtain bids for Korea First Bank and Seoul Bank (by November 15, 1998).

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.

2.  The FSC to complete supervisory examination of the KDB and make recommendations to the MOFE, as needed, as to any remedial actions required.


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

Net domestic assets
    End-September 1998

    Performance criterion 2,480

Actual1 -11,063

End-December 19982 -7,770

End-March 19992 -17,341

Broad money M33

End-June 19984 743,938 (13.2)

End-September 19985,6 773,113 (13.7)

End-December 19986 794,496 (13.5)

End-March 19996 827,733 (14.1)

1With net foreign assets valued at program exchange rates.
2Performance criterion.
312-month growth rate in brackets.
5At end-August (latest data available) M3 was W 771,299 billion (a 12-month growth rate of 13.8 percent).
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-September 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 coverbills. 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-September 1998

    Performance criterion 15.0

Actual 24.5
End-December 19981 23.7
End-March 19991 31.8

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-September 1998 position of US$3.4 billion (including swaps of US$1.5 billion).


Fiscal Sector

(In trillions of won)

Cumulative deficit from January 1, 1998
through September 30, 1998
Program1 10.0

Actual   5.7
Cumulative deficit from January 1, 1998 to:

End-December 19981,2 21.3
Cumulative deficit from January 1, 1999 to:

End-March 19991   5.0

1Indicative ceiling.
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.