Financial Crisis in South Korea
International strategic management | South Korea, financial crisis | Melissa MactavieJodie MackayTeboho LentoSifiso MashishiKarushka naidoo |
South Korea’s current account balance started to deteriorate in 1990, due to the rising inflation, appreciation of the Korean won and the recession of the world economy. In 1991 the current account recorded a deficit of $8.7 billion, which was more than four times the level of the preceding year. The Korean government encouraged capital inflows in order to finance the growing current account deficit. To achieve this objective, capital account liberalisation was accelerated in 1991by altering the Foreign Exchange Management Act.
The limited capital account liberalisation implemented resulted in substantial capital inflows. The large private current account deficits and the maintenance of fixed exchange rate encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
Policymakers were more worried about the effect that the capital inflows would have on the competitiveness of the Korean exports through the appreciation of the Korean won as the U.S Federal Reserve Bank began to raise U.S interest rates to head off inflation, which made the U.S a more attractive investment destination comparative to Southeast Asia, which had been attracting hot money flows through high short term interest rates and raised the value of the U.S dollar. Hot money flows were accumulated because of higher interest rates in the East. As hot money flows into the East started to decrease, currencies started to fall and the government struggled to keep exchange rates at their fixed level against the U.S dollar. The South Korean won weakened to more than 1,700 per U.S dollar from around 800.
South Korea was one of the Southeast Asian nations which had currencies fixed to the U.S dollar, the higher U.S dollar caused their own exports to become more expensive and less competitive
South Korea’s current account balance started to deteriorate in 1990, due to the rising inflation, appreciation of the Korean won and the recession of the world economy. In 1991 the current account recorded a deficit of $8.7 billion, which was more than four times the level of the preceding year. The Korean government encouraged capital inflows in order to finance the growing current account deficit. To achieve this objective, capital account liberalisation was accelerated in 1991by altering the Foreign Exchange Management Act.
The limited capital account liberalisation implemented resulted in substantial capital inflows. The large private current account deficits and the maintenance of fixed exchange rate encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
Policymakers were more worried about the effect that the capital inflows would have on the competitiveness of the Korean exports through the appreciation of the Korean won as the U.S Federal Reserve Bank began to raise U.S interest rates to head off inflation, which made the U.S a more attractive investment destination comparative to Southeast Asia, which had been attracting hot money flows through high short term interest rates and raised the value of the U.S dollar. Hot money flows were accumulated because of higher interest rates in the East. As hot money flows into the East started to decrease, currencies started to fall and the government struggled to keep exchange rates at their fixed level against the U.S dollar. The South Korean won weakened to more than 1,700 per U.S dollar from around 800.
South Korea was one of the Southeast Asian nations which had currencies fixed to the U.S dollar, the higher U.S dollar caused their own exports to become more expensive and less competitive