Korean Economy: Korean Economy: Embracing Changes, Ready for the FutureEmbracing Changes, Ready for the FutureKorean Economy: Korean Economy: Embracing Changes, Ready for the FutureEmbracing Changes, Ready for the Future

May 2006May 2006

Ministry of Finance and EconomyMinistry of Finance and Economy

- 2 -

Economic Development of KoreaEconomic Development of Korea

Trade Volume Trade Volume Gross Domestic Production Gross Domestic Production

0

100

200

300

400

500

600

700

800

900

1960 1969 1978 1987 1996 2005

(US$

bn)

US$ 788 bn. in 2005

0

100

200

300

400

500

600

1960 1969 1978 1987 1996 2005

(US$

bn)

With continued solidWith continued solid growth, Korea has emerged as one of the most growth, Korea has emerged as one of the most resilient and dynamic economies in the world.resilient and dynamic economies in the world.

US$ 546 bn. in 2005

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Overcoming Financial CrisisOvercoming Financial Crisis

Pursuing Market Liberalization

Improving Corporate Governance

Restructuring Financial Markets

ImplementingExtensive Deregulation

- 4 -

Sound External Sector Sound External Sector

FX ReserveFX Reserve Short-term external debt/FX reservesShort-term external debt/FX reserves (%)(%)

96.2

121.4

210.4

155.4

102.8

52.074.1

222.8

199.1

0

50

100

150

200

250

1998 2000 2002 2004 2006

(US$

bn)

51. 6%

81. 6%

58. 1%39. 7%

31. 3%32. 7%

39. 2%28. 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1998 1999 2000 2001 2002 2003 2004 2005

With foreign exchange reserves of US$ 223 billion, With foreign exchange reserves of US$ 223 billion,

Korea’s external sector is sound. Korea’s external sector is sound.

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Competitive Corporate SectorCompetitive Corporate Sector

Korean companies are leading global market with high quality products and Korean companies are leading global market with high quality products and sophisticated designs while their financial strengthssophisticated designs while their financial strengths have greatly improved. have greatly improved.

Debt / EquityDebt / Equity RatioRatio Leading Global PlayersLeading Global Players

196

111114131

145

221215

303

396

80

120

160

200

240

280

320

360

400

1997 1998 1999 2000 2001 2002 2003 2004 2005

(%)

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Improved Profitability of the Financial Sector Improved Profitability of the Financial Sector

(0.6)

0.6

0.2

0.9

1.2

0.7

(1.0)

(0.8)

(0.6)

(0.4)

(0.2)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2000 2001 2002 2003 2004 2005

(%)

Banks’ ROA (Return on Assets)Banks’ ROA (Return on Assets) NPL RatioNPL Ratio

Average ROA of U.S. commercial banks : 1.34%

0

1

2

3

4

5

6

7

8

9

2000 2001 2002 2003 2004 2005 Mar2006

(%)

1.2%

As a result of restructuring efforts, profitability and soundness of the As a result of restructuring efforts, profitability and soundness of the banking sector have continuously improved. banking sector have continuously improved.

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Achieving a Balanced GrowthAchieving a Balanced Growth

With the pace of domestic consumption recovery gathering speed, exports With the pace of domestic consumption recovery gathering speed, exports maintain double digit growth rate despite the appreciation of the KRW.maintain double digit growth rate despite the appreciation of the KRW.

Private ConsumptionPrivate Consumption

4.7

4.24.0

3.0

1.6

0.9

(0.7)(0.3)

-1

0

1

2

3

4

5

2Q2004

3Q2004

4Q2004

1Q2005

2Q2005

3Q2005

4Q2005

1Q2006

(%)

Exports PerformanceExports Performance

28.9%

38.9%

10.7%

11.4%

15.4%

9.0%

12.7%

11.8%

0

10

20

30

40

50

60

70

80

90

2Q04 3Q04 4Q04 5Q05 2Q05 3Q05 4Q05 1Q06

(US

$ b

n)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

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Projection for 2006Projection for 2006Recent GDP Recent GDP GrowthGrowth

Achieving Potential Growth RateAchieving Potential Growth Rate

5.7

4.7

3.3

2.73.2

4.5

6.2

5.3

0

1

2

3

4

5

6

7

2Q2004

3Q2004

4Q2004

1Q2005

2Q2005

3Q2005

4Q2005

1Q2006

(%)

The recovery of the Korean economy is accelerating and we expect to The recovery of the Korean economy is accelerating and we expect to achieve the potential growth rate of around 5% this year.achieve the potential growth rate of around 5% this year.

Growth : Around 5%

Job Creation : 350~400 thousand

Maintain Current Account Surplus

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Prospects for the Korean Economy Prospects for the Korean Economy

GDPGDP(US$ (US$ 778888 bn.bn.))

Trade Volume

(US$ 546 bn.)

20052005 20102010 20152015 20202020

20121 trillion

200820081 trillion1 trillion

2022202233 trilliontrillion

201620162 trillion2 trillion

If the current solid growth continues, Korea’s GDP is forecast to reach If the current solid growth continues, Korea’s GDP is forecast to reach US$ 1 trillion by 2008.US$ 1 trillion by 2008.

20222 trillion

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Investors’ Confidence in the Korean EconomyInvestors’ Confidence in the Korean Economy

Sovereign Credit RatingsSovereign Credit Ratings

A- A A A+

Stable Positive

Spread on Sovereign Bonds (ROK ‘14)Spread on Sovereign Bonds (ROK ‘14)

60

65

70

75

80

85

90

95

100

May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06

Improved competitiveness of the Korean economy can be shown in the Improved competitiveness of the Korean economy can be shown in the upgrade of its sovereign credit ratings and tighter credit spread.upgrade of its sovereign credit ratings and tighter credit spread.

(bp)

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Recent Changes in the Global EconomyRecent Changes in the Global Economy

Fierce and BorderlessCompetition between

Companies

Free Movement of Technology, Information,

Human Capital

Enormous Pools of Capital Circling Globe

at Dizzying Speed

““World Is Flat”World Is Flat” – – Thomas Friedman, NY Times ColumnistThomas Friedman, NY Times Columnist

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VisionVision of the Korean Economyof the Korean Economy

Recent rapid changes of the global economy require new policy paradigm.Recent rapid changes of the global economy require new policy paradigm.

More Nimble and Flexible More Nimble and Flexible

Policy Responses for New Policy Responses for New

ChallengesChallenges

More Mature

and Efficient

Market Economy

Economy with

Strong Social

Safety Net

More Open and

Globalized

Economy

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Major Policies for Future ProsperityMajor Policies for Future Prosperity

Expanding GrowthPotential

AdvancingFinancial System

Enhancing Flexibilityof Labor Market

Creating a More Globalized Economy

Overcoming Challenges

- Oil price hike, Appreciation of KRW, Aging population

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Expanding Growth Potential Expanding Growth Potential

Ease regulations and offer various incentives to promote investmentsEase regulations and offer various incentives to promote investments

Bolster dynamism of SMEs and venture companiesBolster dynamism of SMEs and venture companies

Develop new growth drivers: high value added service, knowledge-Develop new growth drivers: high value added service, knowledge-

based, and high tech industriesbased, and high tech industries

Nurture people with advanced skills and creativityNurture people with advanced skills and creativity

-- Foster the talented in science & engineering sector Foster the talented in science & engineering sector

-- Lure foreign academic institutions and foreign professionals Lure foreign academic institutions and foreign professionals

-- Expand R&D expenditure Expand R&D expenditure

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Advancing Financial System Advancing Financial System

Introduce ‘Financial Investment Services and Capital Market Act’ by Introduce ‘Financial Investment Services and Capital Market Act’ by

combining asset management, securities, futures regulationscombining asset management, securities, futures regulations

-- Enable emergence of advanced investment banks Enable emergence of advanced investment banks

-- Allow development of almost all types of investment instruments Allow development of almost all types of investment instruments

Further liberalize foreign exchange transactionsFurther liberalize foreign exchange transactions

-- OECD capital movement liberalization ratio : 59.4% → 85.1% OECD capital movement liberalization ratio : 59.4% → 85.1%

- - Accelerate the time frame of full foreign exchange liberalizationAccelerate the time frame of full foreign exchange liberalization

- 16 -

Enhancing Flexibility of Labor MarketEnhancing Flexibility of Labor Market

Supreme Court: significant flexibility in judging “urgent managerial

reasons”* required for workforce adjustment

* Decline in operational performance, shifts in manufacturing method,

changes in industry structure

Further enhance the flexibility by easing requirements and procedures

for workforce adjustment

Strengthen social safety net

- Help the unemployed by providing training & education opportunities

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Creating a More Globalized EconomyCreating a More Globalized Economy

Recent FDI TrendRecent FDI Trend

0

2

4

6

8

10

12

14

2001 2002 2003 2004 2005

(US

$ b

n)

Further globalization will lead usFurther globalization will lead us to a more advanced market economy.to a more advanced market economy.

Free Trade AgreementsFree Trade Agreements

Concluded : Chile, Singapore, Concluded : Chile, Singapore,

EFTAEFTA

Under negotiation : US, ASEAN, Under negotiation : US, ASEAN,

Canada, Mexico, India, JapanCanada, Mexico, India, Japan

Joint Study : MERCOSURJoint Study : MERCOSUR

US$ 11.6 bn. in 2005

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Pursuing Multi Track Approach on FTAsPursuing Multi Track Approach on FTAs

Concluded Concluded *EFTA (Iceland, Switzerland, Lichenstein, Norway)

Under NegotiationUnder Negotiation

Joint Joint StudyStudy *Mercosur (Brazil, Argentina, Uruguay, Paraguay)

ASEANASEAN

CanadCanadaa

JapaJapann

U.S.AU.S.A

IndiIndiaa

SingaporeSingapore

ChileChile

EFTA*EFTA*

MexicMexicoo

MercosurMercosur**

- 19 -

Strong Commitment to GlobalizationStrong Commitment to Globalization

Our commitmentOur commitment to continuous market opening and foreign investments is to continuous market opening and foreign investments is as strong as ever. as strong as ever.

Foreign Investors are crucial to the strength anddynamism of our economy.

“Protect lawful and justly

earned profits of foreign

companies”

“Provide a level playing

field for all companies

regardless of nationality”

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Overcoming ChallengesOvercoming Challenges

Oil Price Oil Price

HikeHike

Enhance energy efficiency of each industry

Expand overseas natural resource developments

Promote research on renewable energies

Appreciation Appreciation

of KRWof KRWUtilize as an opportunity to sharpen competitivenessUtilize as an opportunity to sharpen competitiveness

Aging Aging

PopulationPopulation

Expand childcare infrastructure and strengthen support for Expand childcare infrastructure and strengthen support for

childbearing expenseschildbearing expenses

Increase labor force participation of women & senior citizensIncrease labor force participation of women & senior citizens

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Strengthening Economic Cooperation with U.K.Strengthening Economic Cooperation with U.K.

Trade Volume: US$ 8.5 bn.“2nd Largest in Europe”

Korea’s Investments into UK: US$ 2.7 bn.“2nd Largest in Europe”

UK’s Investments into Korea: US$ 6.2 bn.“3rd Largest in Europe”

Expand trade & investment and strengthen strategic partnership in hi-tech industries such as IT and BT.

- 22 -

Developing Free Economic ZonesDeveloping Free Economic Zones

In-CheonIn-Cheon

Chong-Ra (18km2)

Tourism, Leisure

Gwang-YangGwang-YangGwang-YangGwang-Yang

PusanPusanPusanPusan

Young-Jong (138km2)

Logistics, International Business

Gwang-Yang (90km2)

Logistics, Cutting-edge Industries

Song-Do (53km2)

International Business, IT, BT, R&D Industries

Pusan· Jinhae (105km2) Free Trade Zone, R&D,

International Business

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Financial Hub in Northeast AsiaFinancial Hub in Northeast Asia

We also welcome your active participation in our financial market.

Improve asset

management-related

regulations

Improve asset

management-related

regulations

Market-Friendly Regulatory System

Korea Investment Corporation

Stock Market

Provide a more efficient

and globalized trading

environment

Provide a more efficient

and globalized trading

environment

Spearhead development of asset management industrySpearhead development of asset management industry

Offer longer-term fixed income instrumentsOffer longer-term fixed income instruments

Bond Market

- 24 -

Success Stories in KoreaSuccess Stories in Korea

Foreign Companies’ Market ShareForeign Companies’ Market Share

Many global companies are already enjoying success in Korea.Many global companies are already enjoying success in Korea.

10.0% 9.3%

15.5%

21.0%19.9%

21.9%

25.4%

22.9%21.4%

24.0%

0%

5%

10%

15%

20%

25%

30%

2001 2002 2003 2004 2005

Foreign Banks Foreign Asset Management

* * including joint including joint venturesventures

Leading U.K.Leading U.K. Companies in KoreaCompanies in Korea

Thank you.Thank you.