|
South Korea FINANCING DEVELOPMENT
Financing South Korea's economic development in the 1990s was
expected to differ from previous decades in two main respects:
greater reliance on domestic sources and more emphasis on equity
relative to debt. Beginning in the 1960s, foreign credit was used
to finance development, but the amount of foreign debt had
decreased since the mid-1980s. According to the Sixth Five-Year
Economic and Social Development Plan (1987-91), an average annual
growth rate of 8 percent was expected, together with account
surpluses of about US$5 billion a year through 1991.
To realize these growth targets, South Koreans needed the
gross domestic savings rate to exceed the domestic investment
rate; additionally, they needed the financing of future economic
growth to come entirely from domestic sources. Such a situation
would involve reducing foreign debt by US$2 billion a year; and
South Korea would become a net creditor nation in the mid-1990s.
Through the promotion and reform of the securities markets,
especially the stock market, and increased foreign investment,
the sixth plan encouraged the diversification of sources and
types of corporate finance, especially equity finance.
Domestic savings were very low before the mid-1960s,
equivalent to less than 2 percent of GNP in the 1960 to 1962
period. The savings rate jumped to l0 percent between 1970 and
1972 when banks began offering depositors rates of 20 percent or
more on savings accounts. This situation allowed banks to compete
effectively for deposits with unorganized money markets that had
previously offered higher rates than the banks. The savings rate
increased to 16.8 percent of GNP in 1975 and 28 percent in 1979,
but temporarily plunged to 20.8 percent in 1980 because of the
oil price rise. After 1980, as incomes rose, so did the savings
rate. The surge of the savings rate to 36.3 percent in 1987 and
35.8 percent in 1989 reflected the sharp growth of GNP in the
1980s. The prospects for continued high rates of saving were
associated with continued high GNP growth, which nevertheless
declined to 6.5 percent in 1989.
According to Donald S. Macdonald, through the early 1980s
funds for investment came primarily from bilateral government
loans (mainly from the United States and Japan), international
lending organizations, and commercial banks. In the late 1980s,
however, domestic savings accounted for two-thirds or more of
total investment.
Throughout the 1980s, the financial sector underwent
significant expansion, diversification of products and services,
and structural changes brought about by economic liberalization
policies. As noted by Park Yung-chul, financial liberalization
eased interest ceilings. Deregulation increased competition in
financial markets, which in turn accelerated product
diversification. In the early 1980s, securities companies were
permitted to sell securities through a repurchase agreement. By
1985 banks also were allowed to engage in the repurchase
agreements of government and public bonds. In 1981 finance and
investment corporations started dealing in large-denomination
commercial paper. The new form of commercial paper was issued in
minimum denominations of 10 million won, compared to the previous
minimum value for commercial paper of 1 million won.
In order to extend their ability to raise cash, investment
and finance companies introduced a new cash-management account
with a 4 million won minimum deposit in 1983. Investment and
finance corporations managed client funds by investing them in
commercial paper corporate bonds and certificates of deposit.
Money-deposit banks in the mid-1980s began offering similar
accounts, known as household money-in-trust. Trust business
formerly had been the exclusive domain of the Bank of Seoul and
Trust Company; however, after 1983 all money-deposit banks were
authorized to offer trust services.
The financial system underwent two major structural changes
in the late 1970s and 1980s. First, money-deposit banks saw a
sustained erosion of their once-dominant market position (from 80
percent in the 1970 to 1974 period to 55 percent by 1984). One
reason for this decline was that in the 1970s nonbank financial
intermediaries, such as investment trust corporations, finance
companies, and merchant banking corporations, were given
preferential treatment. Further, because the costs of
intermediation at these nonbank financial institutions were lower
than at banks (with their many branches nationwide and their
multitudes of small savers and borrowers), their cost advantages
and higher lending rates allowed them a larger market share.
The second structural change was the rapid increase of
commercial paper and corporate debenture markets. Another
development was the steady growth of investment trust
corporations in the 1980s.
Because of the introduction of tax and financing incentives
by the government that encouraged companies to list their shares
on the stock market, the Korean Stock Exchange grew rapidly in
the late 1980s. In 1987 more than 350 companies were listed on
the exchange. There was an average daily trading volume of 10
million shares, with a turnover ratio of 80 percent. In 1989 the
stock market was tarnished by accusations of insider trading
among the five major South Korean securities firms. The
Securities and Exchange Commission launched an investigation in
late 1989. The popular index of the market soared to a high of
1,007.77 points on April 1, 1989, but plunged back to the 800s in
late 1989 and early 1990.
Business financing was obtained primarily through bank loans
or borrowing on the informal and high-interest "curb market" of
private lenders. The curb market served individuals who needed
cash urgently, less reputable businesspeople who engaged in
speculation, and the multitudes of smaller companies that needed
operating funds but could not procure bank financing. The loans
they received, often in exchange for weak collateral, had very
high interest rates. The curb market played a critical role in
the 1960s and 1970s in pumping money into the economy and in
assisting the growth of smaller corporations. The curb market
continued to exist, along with the formal banking system, through
the 1980s.
Data as of June 1990
|
