OctoberOctober 2008 2008

The Korean Economy:The Korean Economy:

Resilience AmidResilience Amid TurbulenceTurbulence

1. Macroeconomic Performance

2. Current Issues & Answers

3

Stable GDP Growth and Downward Trend in Inflation

Korea shows robust GDP growth

1.1%

1.8%

2.4%

5.3%

2.3%

2.7%

2.6%

5.0%

Japan

EU

US

Korea

Average GDP Growth Rate in 2006-2007

Average GDP Growth Rate in 1H08

2008 CPI – Headline (%) & WTI trend (US$)

3.93.6

3.9 4.1

4.95.5

5.95.6

5.1

0

1

2

3

4

5

6

7

8

9

10

Jan Feb Mar Apr May Jun Jul Aug Sep

0

30

60

90

120

150

WTI

Downward trend in consumer prices

-0.13

-5.21

1Q 08 2Q 08 3Q 08 4Q 08

4

Improving Current Account Surplus

2008 Current account balance (US$ bn)

Current account balance would turn to surplus in 4Q 2008

3.5 ~ 4.0(e)

Robust export growth Diversified export products

Diversified export markets

Source: Bank of Korea

-8.5~-9.0(e)

China22.1%

North America13.3%

EU15.1%

ASEAN10.4%

Japan 7.1%

Others19.8%

Central &South America

6.9%

Middle East5.3%

Source: KITA, as of 2007

Semiconductor

11%

Chemicals

10%

Automobile

10%

Mobile

communication

8%

Machinery

8%

Others

26%

Textile

4%

Shipbuilding

7%

Home appliance

5% Steel 6%

Computer 5%

Exports (US$ bn, YoY Growth, %)

330371

14.1%325

14.4%284

11.8%254

30.9%194

19.8%162

8.0%0

100

200

300

400

2002 2003 2004 2005 2006 2007 Sep.08

Export (USD billion)

23.0%

4.0

4.4

4.8

5.2

5.6

Jan/07 Jun/07 Nov/07 Apr/08 Sep/08

Much Room for Monetary and Fiscal Policy

5

Source: Bank of Korea, Datastream

Korea policy rate trend (%)

Country Prior Current Change

US 2.00 1.50 △ 0.50

EU 4.25 3.75 △ 0.50

UK 5.00 4.50 △ 0.50

Sweden 4.75 4.25 △ 0.50

Swiss 2.50 2.25 △ 0.25

Canada 3.00 2.50 △ 0.50

China 7.20 6.93 △ 0.27

5.0%

△0.25%

Much room for monetary and fiscal policy Simultaneous policy rate reduction by 7 countries

Policy rate (October 8, 2008)

6

Prudent Fiscal Position

Lower debt level than OECD peersKorea continues to produce fiscal surpluses

1.2%

3.3%

1.0%0.7%

0.4% 0.4%

3.8%

2.1%

1.1%

0%

1%

2%

3%

4%

2000 2001 2002 2003 2004 2005 2006 2007 2Q08

Source: Ministry of Strategy and Finance

Surplus well above its peers

-0.4-1.3

-0.5 -0.3

-2.5

-0.7

-2.9

-0.4

-2

2.1

(4)

(2)

0

2

4

Korea

(A)

AA med

ian

A med

ian

Hong K

ong (A

A+)

Slove

nia (A

A)

Portugal

(AA-)

Taiw

an (A

A-)

Italy

(A+)

China

(A+)

Icel

and (A

)

Source: S&P Sovereign Risk Indicator, July 2008, 2008 forecast data

180.0%

33.0%

62.0%

72.0%66.0%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Korea US Japan Germany France

OECD Average: 77%

Government surplus (% of GDP)

Consolidated government balance (% of GDP) Government net debt to GDP (%)

Source: OECD; IMF (Korea data). According to OECD, Korea’s debt to GDP ratio is 26.5%

1. Macroeconomic Performance

2. Current Issues & Answers

Debt forhedgingpurposes93.8 (22%)

Advances forshipbuilding exportscontracts50.9 (12%)

8

Korea’s External Debt Level is Too High?

$144.7bn (34.5% of total) without default risk

Source: Bank of Korea

No risk

External debt structure (US$ bn)

Most of short-term external debt by foreign bank

Large portion of external debt comes from currency hedging by banks and exporters

Source: Bank of Korea

66.0(45%)

79.5(55%)

127.4( 61%)

83.1(39%)

Domestic bank

Foreign bank branch

Total external debt by bank (US$ bn)

Short-term external debt by bank

Domestic bank

Foreign bank branch

Bond Deposits Others

9

Korea’s Foreign Reserves are not liquid?

7496 103

121155

199 210239 262 264 258 239

40

86

132

178

224

270

1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08 2Q083Q08

Adequate amount of foreign reserves

FX reserves (US$ bn)

158170

282296

582997

243

Hong KongSingapore

KoreaTaiwan

IndiaRussiaJapanChina

6th largest reserves globally (August 2008)

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.

Median of peers1: US$ 29.2bn

FX reserves (US$ bn)

Source: Bank of Korea

Highly liquid foreign reserves

Deposit22.0

(9.2%)

Total reserves (US$ bn)

Korea has 6th largest foreign reserves worldwide and most of the foreign reserves are highly liquid

Mostly AA-rated or above bonds217.2

(90.6%)

1,808

Others 0.5 (0.2%)

102.9

80

90

100

110

May Jul. 9/25 9/29 10/01 10/06 10/08

3.1

-1.0

0.0

1.0

2.0

3.0

May Jul. 9/25 9/29 10/01 10/06 10/08

Korean Banks Have a Serious Liquidity Problem?

7-day maturity mismatch ratio (%)

3-month foreign currency liquidity rate (%)

High liquidity ratio: Low risk from duration mismatchNo currency mismatch exists

Operation Amount Financing Amount

Forward exchange purchased (off B/S)

65.7 External debt 127.4

Foreign loans1) 45.5Residential deposits in foreign currency

19.3

Trade bill discount operation

50.5Swap with foreign bank branches 2) 23.0

Others(Securities, deposits, etc.)

40.0Swap with bond investors 2) (foreigners)

32.0

201.7 201.7

Supported by government’s consistent and strict management,

currency mismatch and duration mismatch have been minimized

Guidance: 85%

7-day Guidance: 0%

Foreign currency financing/operation - Korean banks (US$ bn, as of Jun.08)

1) NPL : 0.3%, 2) Estimates (not included in liabilities)

Source: Financial Supervisory Service

Loan to Deposit Ratio is Too High?

11

Loan to deposit ratio has stayed low during recent years

Moderate loan to deposit ratio

Loan to deposit ratio (%)

124.2

103.2

126.8128.2126.5

123.7

104.6105.4

104.2104.2

90

100

110

120

130

140

2007 Jun.2008

Jul.2008

Aug.2008

Sep.2008

excluding CD Including CD

* US : 112%(Including CD, Jul 2008)

12

Real Estate Bubble will burst?

Improving loan to value ratio

Stricter regulation on mortgage than other countries

Dramatic growth of financial assets 1 2

25

62

105

60

113

(12)

54

32

(20)

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007

0%

5%

10%

15%

20%

25%

30%

35%

Household Financial Surplus Household Asset Grow th Debt Grow th

Source: Bank of Korea Financial Stability Report, April 20081 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.

Financial surplus (KRW trn)LTV ratio (%)

Government’s strict DTI and LTV regulation has enhanced household finance soundness

Korea U.S.Hong Kong

Germany Japan

Mortgage/ GDP

33.4% 72.3% 37.3% 52.4% 36.2%

Regulation System

Direct Indirect Direct Mixed Indirect

LTV Limit 40~60% - 60~70%60%

(Portion)Indirect

DTI Limit 40% - 60% - -

47.949.5

52.2

47.548.8

44

48

52

56

2005 2006 2007 1Q08 2Q08

Government Plan to Stabilize Financial Market

13

Two of the five financial stabilization measures would be sufficient in current condition

Should the need for additional steps arise, appropriate measure will be enforced

Measures

Policy Providing liquidityExternal debt

guaranteeAcquisition of insolvent debt

RecapitalizationIncreased

guarantee on bank deposits

CountryUS, UK, Germany,

Australia

UK

Australia

US

USUS, UK, Germany,

France

US, UK, HK, Germany,

Hungary, Australia, Ireland

Korea

● Additional

US$ 30bn

liquidity to

be provided

● 3-year US$ 100 bn guarantee for external

debt

There is no need for additional steps;appropriate measures will be enforced when necessary

Korea: The Case for Investment

● Stable GDP Growth Amidst Global DownturnStable GDP Growth Amidst Global Downturn

● Downward Trend in InflationDownward Trend in Inflation

● Improving Current Account SurplusImproving Current Account Surplus

● Prudent Fiscal PositionPrudent Fiscal Position

● Reasonable Amount of External DebtReasonable Amount of External Debt

● Sufficient Foreign Exchange ReservesSufficient Foreign Exchange Reserves

● Manageable Situation in Real Estate SectorManageable Situation in Real Estate Sector

14

Strong FundamentalsStrong Fundamentals

Stable LiquidityStable Liquidity

● Providing dollar liquidity to banksProviding dollar liquidity to banks

● Government guarantees for Korean banks’ external debtGovernment guarantees for Korean banks’ external debt

● More proactive measures preparedMore proactive measures prepared

Governmental MeasureGovernmental Measure

15

Korean Economy: Positive Power Drives

In history, Korea has proven its power to change crisis into opportunity

Successfully Overcame Successfully Overcame Oil ShockOil Shock

Experience in Asian Experience in Asian Financial Crisis Financial Crisis

More than 5000-year More than 5000-year HistoryHistory

■ Tax cuts

■ Regulatory reforms

■ Global standards in financial sector

Trust in Korean Economy. Positive Power Drives It

Thank You