تجزیه و تحلیل بحران ارز در کره جنوبی

This paper provides empirical evidence on the causes and timing of the 1997 currency crisis in South Korea. A persistent weakness in the economic fundamentals through out much of the pre-crisis period created necessary conditions for the crisis. However, the timing of the currency crisis was determined by a unique combination of an unprecedented increase in default risk faced by the banking system and a decrease in foreign exchange reserves (FXRES) that restricted the ability of the government to bail out. A VAR model identifies two important variables that were crucial in triggering the currency crisis. One is the ratio of dishonored bills (DS) that measures default risk and serves as a proxy for the market value of banks. The other is FXRES that measures the strength of the government's bailout policies. Estimates from a vector autoregressive (VAR) model confirm a strong impact of the lagged changes in the ratio of DS and FXRES on the current changes in the won's value. Immediately before the November crisis, the ratio of DS reached an all-time high while reserves dropped to 1-month imports. These developments significantly contributed to the negative expectations resulting in a massive capital outflow followed by a drastic devaluation of the currency.

The Korean currency crisis in November 1997 took place amidst severe market overreaction and herding, exacerbated by concerns about the economic fundamentals that started showing signs of weakness long before the crisis occurred.1 This paper presents a systematic analysis into causes and timing of the Korean currency crisis. The analysis shows that signs of an impending crisis are evident from the deterioration of many key economic fundamentals over an extended period running up to the crisis. In particular, current account worsened and the GDP growth rate fell in the years immediately before the crisis. A highly leveraged Korean corporate sector exhibited low profitability and the stock market lost its value considerably. Moreover, the government's implicit bailout policies, which offered incentives for moral hazard and adverse selection, encouraged an unprecedented lending boom to finance predominantly low quality investments. 2 As the conglomerates defaulted on their loans, their ability to obtain external financing on their own became seriously limited. Thus the burden fell on the banks, which obtained short-term debt and lent long term to conglomerates and incurred considerable interest rate exposure. The ability of the banks to absorb domestic and external losses was seriously limited due to being undercapitalized—a sure sign of an imminent trouble, especially since the government had limited reserves to rescue the banks. The deterioration of economic fundamentals in 1995–1996 created necessary conditions for a crisis. However, it was the vulnerable banking sector and government's inability to rescue financial and nonfinancial institutions that became directly responsible for triggering the currency crisis in November 1997. This paper aims at determining the causes and timing of the Korean currency crisis within the framework of a vector autoregressive model (VAR). The empirical evidence suggests that the excessive default risk faced by banks and the government's inability to bail out the troubled institutions played a crucial role in determining when the crisis would occur. In our VAR system, the ratio of dishonored bills (DS), an aggregate measure used by the Bank of Korea (BOK), represents the extent of default risk faced by the Korean banks, and foreign exchange reserve (FXRES) serves as a measure of government's ability to rescue troubled institutions.3 A higher ratio of DS implies a lower market value of the banks since the banks are required to absorb losses from the private sector instead of maximizing their value. Similarly, reserve levels that are inadequate to finance the current account deficit for a significant period of time reflect poorly on the government's ability to bail out and adversely affect the sovereign risk rating of a country.4 The above two variables, ratio of DS and reserve levels, together help us determine the threshold effect or the timing of the crisis. It is noteworthy that the use of the ratio of DS, as a proxy for the market value of banks, departs from the tradition of analyzing the role of external debt in the crisis. Previous empirical studies focus on proxies such as the proportion of short-term debt to total external debt, the interest rate on external debt, and interest rate differential between domestic and foreign debts. Empirical results from these studies indicate that the intensive foreign short-term debt is one of the main reasons for the crisis.5 However, these results do not provide us with any insight into the timing issue because high levels of short-term debt do not necessarily imply the weakness of the private and banking sectors.6 On the contrary, the ratio of DS as a proxy for the market value of the banks has a distinct advantage in that any unusual increase in it would signal creditors to pull out of the country. Therefore, the ratio of DS is a much better variable to identify the threshold effect. By similar reasoning, changes in FXRES, a proxy for the sovereign risk, also play an important role in indicating the timing of the crisis. In the event of a bank failure, the next defense rests with the government. Hence, a sharp increase in the ratio of DS and a low level of reserves are capable of triggering a currency crisis. The VAR estimates indicate that the won–dollar exchange rate process is influenced by the lagged changes in the ratio of DS and in FXRES. Thus, the ratios of DS and FXRES are the two most significant factors that triggered the currency crisis in November 1997. The ratio of DS sharply increased to unprecedented levels in October 1997, suggesting increased domestic and external loan losses. Consequently, the rating agencies downgraded the Korean debt. The banking system could have survived if it were able to absorb the internal and external losses. However, that was not the case. As it turned out, banks were seriously undercapitalized. Simultaneously, due to sustained growth in the current account deficit and the government's intervention in the FXRES, reserves dropped precipitously to a level that was barely sufficient to finance 2 months of imports. This reflected in rapid deterioration in the sovereign risk rating, to which the market reacted by pulling out of South Korea. Thus, all the factors were uniquely positioned to trigger the currency crisis in November 1997. Several empirical studies focus on understanding the role of the macroeconomic variables and their relative importance in contributing to the crisis. For instance, Corsetti, Pesenti, and Roubini (1998) present data analysis of the Asian crisis before and after the crisis. Barth, Brumbaugh, Ramesh, and Yago (1998) and Kim and Woo (2000) also use data analysis to study the Asian crisis. Corsetti et al. (1998) and Edwards (2001) use multiple regressions with and without lagged variables to study crisis. Frankel and Rose (1996), Eichengreen, Rose, and Wyplosz (1996), and Park and Rhee (1998) develop Probit models to measure the significance of various economic variables in predicting the crisis. Kaminski, Lizondo, and Reinhart (1997) study pre-crisis behavior of currency-crisis indicators. Berg and Pattilo (1998) address the question of whether the currency crises are predictable. Flood and Marion (1999) present a synthesis on the recent currency crisis literature. In a recent paper, Harvey and Roper (1999) present a microlevel approach by taking into account the performance of Asian corporations to better understand the Asian financial crisis.

This paper presents an analytical evaluation of the economic fundamentals of South Korea prior to the 1997 currency crisis and attempts to identify the factors that played a decisive role in triggering the currency crisis. While most of the economic fundamentals deteriorated in 1995–1996 creating necessary conditions for a crisis, it was weakness in the banking sector and the government's inability to bail out that became directly responsible in triggering the currency crisis. The foregoing conclusion is derived through a VAR model that estimates the relationship between the won–dollar exchange rate and several lagged variables that represent the weakness in macroeconomic fundamentals drawn from various sectors of the economy. Although several variables indirectly affect the won–dollar exchange rate, the model identifies two variables, the ratio of DS and FXRES that play the most important role in determining the timing of the currency crisis. The ratio of DS, a measure of default risk used by the BOK, proxies the market value of the banking sector and the level of reserves measures the government's ability to rescue the banks in case they fail. Results show that current changes in the won–dollar exchange rate are significantly positively correlated to the first and second order lagged changes in DS and significantly negatively correlated with the third order lagged change in FXRES. For quite some time before the 1997 crisis, highly leveraged Chaebols defaulted on the debt payments. As a result, the ratio of DS increased to unprecedented levels in September and October 1997. Similarly, the decline in the FXRES in August 1997 was the largest since January 1996. Rating agencies downgraded the Korean debt and reduced the sovereign risk rating. Foreign creditors increased borrowing rate and, as a result, the banking system suffered heavy external losses due to unhedged interest rate exposure. The government could not save them because of low FXRES. The timing of the unprecedented increase in the ratio of DS and FXRES is consistent with the model's prediction that the banks and government's foreign reserve policy played crucial role in triggering the currency crisis in November 1997. These developments significantly contributed in negative expectations in the market. The result was massive capital outflows followed by an inevitable and drastic devaluation of the won.