QUARTERLY ECONOMIC REVIEW
JUNE 1999


Flow of Funds in 1998
 

   . Introduction
 

      Looking at the flow of funds in 1998, the financial pattern of each economic entity changed markedly after the November 1997 currency crisis. First, the business and individual sectors' external fund-raising shrank sharply. During the year 1998, the scale of the business sector's external fund-raising fell to just one quarter of its level in the previous year and the individual sector moved to a large net redemption position. This reflected both a credit crunch and the slowing of demand for funds in response to the sluggishness of investment and consumption spending after the currency crisis.

      In the case of the financial sector, the intermediary function of financial institutions weakened significantly. Financial institutions utilized their funds more in purchasing securities such as Monetary Stabilization Bonds and beneficiary certificates rather than in making loans to the business and individual sectors. This reflected both the subdued demand for funds from the business and individual sectors and financial institutions' reluctance to lend for fear of new bad loans' arising in the course of the restructuring of the financial and corporate sectors. Consequently, the amount of funds supplied to domestic nonfinancial sectors by the financial sector(other than the Bank of Korea) fell to one third of its level in 1997, implying a decline in the importance of intermediation for financial institutions. In contrast, the scale of fund-raising and utilization among financial institutions themselves expanded substantially with the increase in the volume of securities transactions.

      In particular, the volume of financial transactions among financial institutions expanded both with their increased absorption of Non-performing Asset Resolution Fund Bonds and Deposit Insurance Fund Bonds, which had been issued mainly for the restructuring of financial institutions, and through the medium of beneficiary certificates in investment trust companies.

      In the government sector, the volume of the financial surplus decreased greatly compared with the previous year due to the faltering of tax revenues amid depressed economic conditions.

      The overseas sector exhibited a financial deficit(net increase in Korea's external assets) as the domestic sector registered a financial surplus in response to the current account surplus.

      Meanwhile, as of the end of the year 1998, the debt of nonfinancial sectors stood at 1,115.8 trillion won, which was a small decrease compared with the previous year. Reviewing the debt of each of the nonfinancial sectors, that of the business and individual sectors both shrank while that of the government sector expanded.

     The volume of financial transactions(increase in financial assets) stood at 329.9 trillion won during the period under review. And as of the end of the year 1998, overall financial assets outstanding amounted to 2,989.9 trillion won. Accordingly the financial interrelation ratio(Financial assets outstanding/Nominal GNI), which measures the degree of financial asset accumulation in the economy as a whole, rose from the 5.08 of 1997 to 6.75.

 

   II. Features of Sectors' Financial Transactions

1. Sharp contraction in business sector's fund raising and financial deficit

    A. Fund raising

      During the year 1998, the business sector's total amount of funds raised contracted to 28.4 trillion won, which represented only one quarter of that in the previous year.

      The sharp reduction was brought about by the decreased demand for borrowings in response to subdued investment activity as well as the credit crunch in the financial market that bit even deeper in the course of financial-sector restructuring.

      Looking at the pattern of funds raised, both the volume of indirect finance, i. e., borrowings from financial institutions, and of borrowings from overseas showed a net redemption position. In contrast, the amount of direct finance, i. e., the issue of securities such as stocks and corporate bonds, increased sharply compared with the preceding year.

      The volume of the sector's funds raised through indirect financing showed a negative position of 15.0 trillion won during the period under review, owing to the decrease in borrowings both from banks and from non-banks such as merchant banking corporations and trust accounts.

      Funds raised through direct finance increased from the 44.1 trillion won of the previous year to 49.7 trillion won, as corporations increased their issuance of equities in order to reduce their debt ratios and expanded their corporate bonds issues due to the concentration of the demand for working capital funds on the bond market as lenders retreated from the market. As a result, the issuance of corporate bonds and equities emerged as the main funding source of corporations. Meanwhile, borrowings from overseas showed a net redemption of 10.2 trillion won with the sharp decrease in import-related credits during the period under review.


<Table 1>
Fund Raising by the Business Sector

Unit : billion won, per cent          



1996

1997

1998

Amount

%

Amount

%

Amount

%

Fund Raising

118,769

100.0

118,022

100.0

28,360

100.0

Indirect finance
   
Borrowings from DMBs
   
Borrowings from non-banks

33,231
16,676
16,555

28.0
14.0
13.9

43,375
15,184
28,191

36.8
12.9
23.9

-15,003
54
-15,487

-52.9
0.2
-54.6

Direct finance
   
(Commercial paper)
   (Stocks)

   
(Corporate bonds)

56,097
20,737

12,981
21,213

47.2
17.5
10.9
17.9

44,087
4,421
8,974
27,460

37.4
3.7
7.6
23.3

49,749
-11,678
13,515
45,907

175.4
-41.2
47.7
161.9

Borrowings from abroad
Others1)

12,383
17,058

10.4
14.4

6,563
23,997

5.6
20.3

-10,196
3,810

-36.0
13.4

    B. Fund utilization

      In the year under review, the business sector disposed of financial assets to a net total of 1.9 trillion won. The disposal reflected its weakened capacity to accumulate as a result of both the contraction of its fund-raising and the weakening of business earnings. The mechanism at work in the previous year, when it had gathered 54.4 trillion won worth of financial assets, went into reverse. Viewing the pattern of fund utilization by type of asset, deposits at financial institutions shifted from the 15.8 trillion won of the preceding year to a negative position of 5.4 trillion won. Holdings of securities contracted from the 6.9 trillion won of the previous year to 1.5 trillion won, with a fall in holdings of commercial paper more than offsetting a rise in those of beneficiary certificates.

<Table 2> Fund Utilization by the Business Sector

Unit : billion won         


1996

1997

1998

Fund Utilization

49,897

54,425

-1,921

Deposits
   Deposit money banks

   
Non-banks

18,974
8,721
10,253

15,818
6,241
9,577

-5,439
2,943
-8,382

Securities
   
(Beneficiary certificates)
   
(Commercial paper)

10,826
428
3,907

6,919
1,319
-3,448

1,516
12,250
-11,513

Foreign claims
Others1)

4,534
15,563

7,317
24,371

9,136
-7,134

   C. Financial deficit

      In the year 1998, the financial deficit(the balance between fund raising and fund utilization) of the business sector shrank from the 63.6 trillion won of the previous year to 30.3 trillion won, which represented only one half of its level in 1997. Accordingly, the ratio of its financial deficit to nominal GNI fell from 14.1 percent in the preceding year to 6.8 percent.

      The reason for the large drop in the business sector's financial deficit was mainly the sharp fall in the demand for investment funds in line with the decline in equipment investment after the currency crisis.

      Looking at the trend of the business sector's financial deficit since the early nineties, the scale of its financial deficit had expanded each year in response to the rise in external fund-raising needed to finance its equipment investment. But during the year 1998, the volume of external fund-raising and the sector's financial deficit both shrank abruptly as a result of the downturn in fixed investment.

Business Sector's Financial Deficits and Growth Rate of Fixed Investment

Unit : billion won, per cent          


1992

1993

1994

1995

1996

1997

1998

Financial deficits
Volume of external
   
funds raised

30,966
54,888
 

35,957
64,981
 

49,122
89,041

58,954
100,016
 

68,872
118,769
 

63,597
118,022
 

30,281
28,360
 

Growth rate of fixed investment

7.5

10.5

16.0

18.9

11.2

3.3

-16.8



2. Net redemption of borrowings by individual sector

   A. Fund Raising and Utilization

      During the year 1998, the individual sector recorded a net redemption of borrowings to the value of 29.0 trillion won due to both the slowing of demand for borrowings in response to the sluggishness of consumption spending and the reluctance of banks and non-bank financial institutions to lend. Meanwhile, the volume of funds invested by the individual sector in the form of financial assets during the period eased from the previous year's 86.3 trillion won to 56.1 trillion won, owing to the weakened capacity to save caused by the decline in personal incomes and the redemption of outstanding debt.

      Looking at funds utilization, the amount of deposits at financial institutions declined, while that of securities holdings rose as a result of portfolio shifts, mainly out of banks' trust products and into the bond-type beneficiary certificates offered by investment trust companies, which provide relatively high yields.

      Deposits at financial institutions shrank from the 60.4 trillion won of the previous year to 21.3 trillion won. This was attributable to the decreases both in those trust products not covered by deposit insurance and in deposits at insurance companies, which are relatively illiquid and provide low interest rates, whose effects were only partially offset by increases in time & savings deposits at deposit money banks and in postal savings deposits. In contrast, the sector's holding of securities surged from the 20.1 trillion won of the previous year to 33.5 trillion won, as holdings of beneficiary certificates increased sharply.

<Table 3> Fund Raising and Utilization by the Individual Sector

Unit : billion won, per cent          



1996

1997

1998

Amount

%

Amount

%

Amount

%

Fund Raising (A)
   
(Borrowings from DMBs)
   
(Borrowings from Non-banks)

38,845
10,259
20,960

100.0
26.4
54.0

46,400
9,466
22,665

100.0
20.4
48.8

-29,026
-3,176
-17,609

100.0
10.9
60.7

Fund Utilization (B)

76,356

100.0

86,296

100.0

56,099

100.0

   Deposits
     Deposit money banks
      
(Time & savings deposits)
      
(RPs)
     
Non-banks
      
(Life insurance & pension funds)
      
(Trust accounts of banks)

59,938
17,562
14,300
-209
42,376
16,925
9,693

78.5
23.0
18.7
-0.3
55.5
22.2
12.7

60,379
18,922
16,320
5,785
41,458
16,287
12,827

70.0
21.9
18.9
6.7
48.0
18.9
14.9

21,303
8,391
23,224
-5,505
12,913
1,116
-14,984

38.0
15.0
41.4
-9.8
23.0
2.0
-26.7

   Securities
      
(Beneficiary Certificates)

   Others1)

14,056
4,157

2,362

18.4
5.4

3.1

20,061
6,949

5,856

23.2
8.1

6.8

33,511
34,393

1,285

59.7
61.3

2.3

Financial Surplus (B-A)

37,511


39,896


85,124


      Looking at the composition of financial assets held by the individual sector during the period, the share of securities holdings rose from the 23.2 per cent of the previous year to 59.7 per cent while that of deposits at bank and non-bank financial institutions fell.


    B. Financial surplus

      During the year 1998, the individual sector's financial surplus(the balance between fund raising and fund utilization) expanded from the 39.9 trillion won of the preceding year to 85.1 trillion won. This was largely because savings increased, centering on the high-income bracket, as consumer spending shrank even more rapidly than incomes. Together with the decrease in home-buying, this resulted in an expansion of financial savings.

 

<Table 4> Indicators Related with Individual Sector's Financial Surplus

Unit : per cent           


1994

1995

1996

1997

1998

Growth rate of nominal GDP
Growth rate of private consumption1)
Financial surplus rates of families in cities2)

16.5
18.7
28.2

16.7
17.3
29.0

10.9
13.2
18.3

8.3
9.1
29.6

-0.8
-1.8
31.5

 

3. Reduced intermediation by the financial sector

      In the year under review, the amount of funds supplied to domestic nonfinancial sectors(business, individual and government sectors) by the financial sector(except the Bank of Korea) shrank sharply from 111.1 trillion won in the previous year to 40.2 trillion won, a decrease of almost two-thirds. This came about despite the rise in the scale of funds supplied through the purchase of securities such as corporate bonds, and was ascribable to the fall in financial institutions' lending activity centering on banks, insurance companies and merchant banking corporations, which was caused by both the subdued demand for funds from the business and individual sectors in view of the economic recession and by the financial institutions' reluctance to lend for fear of new bad loans' arising.
 

Trends in the Volume of Funds Suppiled to the Nonfinancial Sector

Unit : flow basis, trillion won         


1994

1995

1996

1997

1998

Total 1)

84.7

84.8

98.6

111.1

40.2

  loans

69.4

56.9

64.8

75.2

-31.1

  securities

15.3

27.9

33.8

35.9

71.3

      In contrast, the volume of financial transactions among financial institutions expanded greatly over the period under review. This was largely because of their large absorption of Non-performing Asset Resolution Bonds and Deposit Insurance Fund Bonds, which had been issued mainly for the restructuring of financial institutions. They also utilized their funds mainly for the purchase of securities such as Monetary Stabilization Bonds and beneficiary certificates rather than making loans to the business or individual sectors.

<Table 5> Trends in Funds Transaction among Financial Institutions

Unit : flow basis, trillion won         


1994

1995

1996

1997

1998

Deposits

0.7

7.5

4.4

20.6

8.0

Securities

3.9

5.4

8.7

24.8

116.4

   (Monetary Stabilization Bonds)

0.3

0.6

-0.6

0.2

21.0

   (Beneficiary certificates)

0.7

2.4

1.9

5.0

55.7

   (Corporate bonds)1)

0.0

0.0

1.0

9.5

36.6

Loans

-3.9

-1.6

1.0

9.8

11.2

Total

0.7

11.3

14.0

55.1

135.6

4. Reduction in Government Sector's Financial Surplus

      In the year under review, the government sector's financial surplus slid from the 15.7 trillion won of the previous year to 7.7 trillion won. This was influenced by the faltering of tax revenues during the business recession as well as the increase in government spending in order to support the unemployed, etc.

      The amount of funds raised by the government sector swelled from the 9.5 trillion won of the previous year to 27.6 trillion won, with a large expansion in issue volumes of government and public bond such as Treasury bonds and Small & Medium Industry Promotion Bonds. The amount of funds utilized by the government sector in the form of financial assets increased from the 25.2 trillion won of the preceding year to 35.3 trillion won owing to the increase in time & savings deposits as well as government loans and capital participations in the equity of financial institutions in order to support their restructuring.


<Table 6> Fund Raising and Utilization by the Government Sector

Unit : trillion won, per cent           


1996

1997

1998

Amount

%

Amount

%

Amount

%

Fund Raising (A)
   
(Public bond issues)
   
(Borrowings from financial institutions)
   
(Borrowings from abroad)

4,073
2,332
329
-132

100.0
57.3
8.1
-3.2

9,518
2,591
-349
6,148

100.0
27.2
-3.6
64.6

27,614
15,258
4,678
6,343

100.0
55.3
16.9
23.0

Fund Utilization (B)
   
Deposits
     
(Checking account deposits)
   
Loans
   
Others
     
(Stocks)
     
(Capital participations)
     
(Bonds)

20,138
3,618
-457
4,812
11,708
887
547
4,290

100.0
18.0
-2.3
23.9
58.1
4.4
2.7
21.3

25,223
2,532
53
11,196
11,495
-400
2,769
3,128

100.0
10.0
0.2
44.4
45.6
-1.6
11.0
12.4

35,343
4,127
-599
13,613
17,604
4,159
1,632
5,694

100.0
11.7
-1.7
38.5
49.8
11.8
4.6
16.1

Financial Surplus(B-A)

16,066

-

15,705

-

7,729

-



5. Financial Deficit Registered by Overseas Sector

      During the year under review, the overseas sector showed a financial deficit(increase in Korea's net external assets) of 49.9 trillion won as the domestic sector recorded a financial surplus.

      The domestic sector's claims on the rest-of-the-world(increase in fund-raising by the overseas sector) swelled to 53.6 trillion won during the period, owing to the abrupt rise in foreign reserves associated with the substantial current account surplus and the increase in the issuance of Foreign Exchange Stabilization Bonds.

      On the other hand, the overseas sector's claims(increase in Korea's external liabilities) fell to 3.7 trillion won from the 16.8 trillion won of the previous year. This contraction was influenced by the decrease in import-related credits and the increased redemption of foreign currency denominated bonds in the latter half of the year under review.

      Its effects were, however, partially offset by the increase in inward foreign direct investment.


<Table 7> Flow of Funds between the Domestic and Overseas Sectors

Unit : trillion won          


1996

1997

1998

Fund Raising(Foreign Claims: A)
   
(Foreign exchange holdings)

12,836
312

4,587
-13,851

53,636
45,044

Fund Utilization(Foreign Debts: B)
   
(Foreign trade credits)
   
(Foreign currency denominated bonds)
   (Financial debentures)
   
(Public and bank loans)

31,113
4,213
9,148
-

523

16,803
421
8,766
-
7,058

3,705
-8,654
-6,731
6,320
19,695

Financial deficit(A-B)

-18,277

-12,216

49,930





    . Accumulation of Financial Assets and Debt of the Nonfinancial Sectors

1. Accumulation of Financial Assets

      During the year under review, the volume of financial transactions(increase in financial assets) decreased to 329.9 trillion won from the 392.2 trillion won of the preceding year. As of the end of the year 1998, total financial assets outstanding registered 2,989.9 trillion won. Accordingly the financial interrelation ratio(Financial assets outstanding/Nominal GNI), which measures the degree of financial asset accumulation in the economy as a whole, moved up from 6.08 at the end of the previous year to 6.75. Compared with those in other countries, Korea's financial interrelation ratio remains somewhat low, trailing that of Japan(8.35 in 1997), and of the U. S. A.(8.36 in 1997).

<Table 8> Trends in Financial Asset Accumulation

Unit : trillion won, per cent          


1994

1995

1996

1997

1998

Amount of increase in financial assets

Financial assets outstanding
Financial interrelation ratio(times)

253.9
(39.8)
1,556.5
4.82

286.9
(13.0)
1,836.5
4.88

319.2
(11.3)
2,168.4
5.20

392.2
(22.9)
2,741.2
6.08

329.9
(-15.9)
2,989.9
6.75

      Looking at the financial interrelation ratio by type of financial asset, that of Korea for securities was lower than that of U. S. A. but higher than that of Japan. Korea's financial interrelation ratio for currency, deposits and insurance was similar to that of the U. S. A..

<Table 9> Financial Interrelations Ratios of Selected Countries

Unit : times          


Korea

Japan(1997)

U.S.A.(1997)

1997

1998

Financial interrelations ratio
 
(Nonfinancial sector)
Currency, Deposits, Insurances
Securities

6.08
(2.62)
1.59
1.36

6.75
(2.84)
1.68
1.92

8.35
(4.19)
2.84
1.67

8.36
(4.36)
1.69
3.48



2. Debt of the Nonfinancial Sectors

    As of the end of the year under review, the debt of the nonfinancial sectors(outstanding basis) decreased from the 1,130.2 trillion won of the preceding year to 1,115.5 trillion won, representing a 1.3 percent fall over the previous year. The ratio of debt of the nonfinancial sectors to nominal GNI remained at 2.5, the same figure as at the end of the year 1997. Reviewing the debt of the various nonfinancial sectors, that of the business and individual sectors decreased compared with the previous year while that of the government sector increased due to the expansion of the government's role in the process of economic restructuring.

< Table 10 > Trends in the Debt of the Nonfinancial Sectors

Unit: trillion won, per cent         


1996

1997

1998

Amount

%

Amount

%

Amount

%

Business
Individual
Government

630.2
253.7
28.6

69.1
27.8
3.1

788.1
300.1
42.0

69.7
26.6
3.7

777.9
271.1
66.5

69.7
24.3
6.0

Total(A)

912.5

100.0

1,130.2

100.0

1,115.5

100.0

A/Nominal GNI(times)

2.2

2.5

2.5


      On the other hand, looking at the business sector's debt by debt instrument, borrowings from financial institutions decreased due to financial institutions' reluctance to lend so as to ensure they met the 8 per cent capital adequacy ratio set by the Basel Committee while the issuance of bonds such as corporate bonds expanded over the previous year.

<Table 11> Trends of the Business Sector's Debt by Instrument

Unit : trillion won, per cent           


1996

1997

1998

Amount

%

Amount

%

Amount

%

Borrowings from financial institutions
   (Borrowings from DMBs)

   
(Borrowings from non-banks)
I
ssue of Debentures
   
(Corporate bonds)
   
(Commercial paper)
Bills payables
Borrowings from abroad
Others

270.8 130.8 140.0
176.0 111.4 64.6
62.0
42.8
78.6

43.0
20.8
22.2
27.9
17.7
10.2
9.8
6.8
12.5

335.8 161.1 174.7
207.9 138.9 69.0
74.5
79.0
90.9

42.6
20.4
22.2
26.4
17.6
8.8
9.5
10.0
11.5

312.6 156.5 156.1
242.1 184.8 57.3
69.0
54.0
100.2

40.2 20.1 20.1
31.1 23.7
7.4
8.9
6.9
12.9

Total(A)

630.2

100.0

788.1

100.0

777.9

100.0

A/ Nominal GNI(times)

1.5

1.7

1.8





<Table 12> Movements of Financial Transactions in 1998

Unit : trillion won          


1994

1995

1996

1997

1998

Business sector's deficit
   
Fund raising
      
Indirect finance
      
Direct finance
      
Borrowings from abroad
   
Fund utilization

49.1
89.0
39.6
33.9
4.4
39.9

59.0
100.0
31.9
48.1
8.4
41.1

68.9
118.8
33.2
56.1
12.4
49.9

63.6
118.0
43.4
44.1
6.6
54.4

30.3
28.4
-15.0
49.7
-10.2
-1.9

Individual sector's surplus
   
Fund raising
   
Fund utilization

32.9
33.3
66.2

39.5
30.0
69.5

37.5
38.8
76.4

39.9
46.4
86.3

85.1
-29.0
56.1

Government sector's surplus
   
Fund raising
   
Fund utilization

9.5
1.7
11.2

14.8
4.1
18.9

16.1
4.1
20.1

15.7
9.5
25.2

7.7
27.6
35.3

Financial sector's fund raising
Financial sector's fund utilization

118.7
120.4

137.0
133.6

144.7
141.7

213.6
209.4

249.4
236.7

Amount of increase in financial assets Financial assets outstanding
Financial interrelation ratio(times)

253.9
1,556.5
4.82

286.9
1,836.5
4.88

319.2
2,168.4 5.20

392.2
2,741.2
6.08

329.9
2,989.9
6.75

Debt of the nonfinancial sectors1)

    
Business sector
    Individual sector
    
Government sector

642.4
<
2.0> 438.0
184.6
19.8

757.9
<
2.0> 519.5
214.6
23.8

912.5
<
2.2> 630.2
253.7
28.6

1,130.2
<
2.5> 788.1
300.1
42.0

1,115.5
<
2.5> 777.9
271.1
66.5

 

    . Implications

 
      As has been reviewed above, the scale of the business sector's external fund-raising had expanded each year in response to the increase in funds demand for equipment investment since the early nineties. But during the year under review after the currency crisis, the volume of external fund-raising shrank to one fourth of its level in the preceding year as a result of the slowing of the demand for borrowings in response to the sluggishness of corporate investment. Financial institutions placed funds in holdings of securities such as Monetary Stabilization Bonds and beneficiary certificates, which offer relatively high stability, rather than making loans for fear of fresh bad loans' arising in the course of the restructuring of the financial and corporate sectors. This resulted in both an abrupt fall in the amount of funds channelled to the domestic nonfinancial sectors by the financial sector(apart from the central bank) and a surge in the volume of fund-raising and utilization among financial institutions themselves, implying a decline in their intermediary function. Accordingly, we need to take measures to encourage the channelling of financial institutions' available funds that remained within the financial sector itself into productive activities such as those of the business sector. Financial institutions themselves also need to take efforts to locate eminently creditworthy companies through the advancement of credit screening techniques and to increase their lending to such companies. And during the year 1998, a large volume of funds, more than 100 trillion won, flowed into beneficiary certificates offered by investment trust companies, so appropriate and systematic countermeasure should be devised in order to engage this large volume of funds in real economic activities through further development of the direct financial markets, etc. On the other hand, during the period under review, the volume of the business and individual sectors' fund-raising shrank while that of the government sector's expanded owing to the heightened government role in the process of restructuring. Considering that the volume of the government sector's fund-raising is expected to increase constantly in the future, we will have to be careful that private sector economic activities do not decline in response to a crowding-out effect, as the government sector's fund-raising pushes upward pressure on market interest rates.


 The Bank of Korea