Seoul, Korea
July 12, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. Korea has experienced a strong economic recovery since entering into a stand-by arrangement with the IMF in December 1997, thanks to the resolve of the Korean people and the effective leadership of President Kim Dae-jung. There are ample signs of a remarkable turnaround: economic growth has rebounded sharply; inflation has remained under control; the unemployment rate has fallen; investment has picked up; exports have expanded. The improved external situation has allowed Korea to repurchase the funds drawn under the SRF ahead of schedule, and Korea's sovereign credit rating has been raised to investment grade.

2. Korea's fast recovery has been facilitated by the government's enactment of policies to provide fiscal stimulus and the lowering of interest rates. Moreover, the government's efforts to expand the social safety net have helped to preserve social cohesion, which is necessary for carrying out drastic reforms. With economic recovery under way, the process of rebalancing macroeconomic policies began with the budget for 1999 when the consolidated central government deficit was reduced to 2.7 percent of GDP. Fiscal policy for 2000 envisages an adjustment in the primary balance of the consolidated central government by about 1½–2 percent of GDP, returning Korea to a position of primary surplus.

3. Good progress has been made in consolidating and recapitalizing the banking system, and reforms in the financial sector will increasingly focus on operational improvements. The government has concluded the sale of a majority stake in Korea First Bank to Newbridge Capital. A new chief executive officer of Seoul Bank has been appointed, and privatization of this bank will be prepared, through consultations with Deutsche Bank. The independence and autonomy of the Financial Supervisory Commission have been enhanced through revisions to the Government Organization Act. New loan classification and provisioning guidelines based on forward-looking criteria were implemented at the end of 1999.

4. As for reforming nonbank financial institutions, the government recognizes that the reform of the investment trust industry is critical. A series of measures has been implemented to improve the industry's financial soundness, to strengthen its regulation and supervision, and to address its liquidity problems. New investments in funds will be marked-to-market from July 2000, setting the stage for more sound and transparent investment management.

5. The government remains fully committed to the restructuring of the corporate sector. The dismantling of the Daewoo group was a milestone in this regard. The debt-to-equity ratio of chaebols has been lowered significantly, and its progress will be continuously monitored. The relationship between business and labor is now much more stable. In the public sector, a number of public enterprises has been privatized or restructured, and many government regulations have been abolished.

6. In implementing its economic policies in the period ahead, Korea places high priority in maintaining the current economic expansion with macroeconomic stability and deepening structural reforms in both the financial and corporate sector so as to lay the foundation for sustainable economic growth. In setting monetary policy, the Bank of Korea will pay close attention to the possible emergence of inflationary pressures as well as the situation in financial markets. As noted above, the process of medium-term fiscal consolidation has already begun with the budget for 1999. A balanced budget is planned to be achieved by 2003.

7. The attached Memorandum on Economic Policies for the Seventh and Eighth Review outlines the major policies for the coming months and updates the Memorandum on Economic Policies of November 24, 1999. During this review, the IMF and Korea agreed to revise Korea's macroeconomic outlook to reflect the faster than expected recovery. In addition, both quantitative and structural performance criteria have been set for the period through September 2000. The Korean government will continue to work in close collaboration with the Fund in the period ahead.

8. All quantitative performance criteria for end-December 1999 and end-March 2000 have been met, and the two structural performance criteria for end-December 1999 have also been met. With regard to the structural performance criteria for January 31, 2000 and March 31, 2000, although the necessary actions were not completed by the due dates, they have now been completed, or will be completed soon, as outlined in greater detail in Annex A of the attached Memorandum on Economic Policies. On this basis, we request waivers of the structural performance criteria for January 31, 2000 and March 31, 2000.

9. This is the final review under the stand-by arrangement, and the arrangement will expire on December 3, 2000.

Korea: Memorandum on Economic Policies

Macroeconomic Policies
Objectives and outlook	Economic policies aim to: Ensure that the economic expansion follows a sustainable path with low inflation; Complete the remaining agenda in financial sector and corporate restructuring in order to improve resource allocation and boost productivity growth over the medium term; and Maintain an adequate social safety net that focuses on improving opportunities for the unemployed.
	Following a spectacular recovery in 1999 when output increased by 10.7 percent, growth in 2000 is projected to moderate to about 8–8½ percent. Inflation is expected to be contained below 2½ percent (period average basis) in 2000, and the current account balance would continue to narrow but remain in surplus.
Monetary and exchange rate policy	Monetary policy will pay close attention to possible internal and external imbalances as well as the situation in financial markets with the aim of locking in the low inflation environment over the medium term. Inflation remains benign, but looking ahead interest rates may need to be adjusted to address possible inflationary pressures as the degree of slack in the economy is reduced. Exchange rate policy will remain flexible and intervention in the foreign exchange market will be limited to smoothing operations.
Fiscal policy in 2000	In 2000 there has been a further shift in the emphasis of fiscal policy away from providing support for the economic recovery and towards a process of medium-term consolidation. The government had originally targeted a consolidated central government deficit of 3½percent of GDP for 2000. With a faster-than-expected economic expansion, which has already contributed to strong revenue performance in the first four months of the year, the budget deficit target has been revised down to 2–2½ percent of GDP. The deficit target includes the operations of the civil service pension fund, which from 2000 is being consolidated with the central government budget to improve fiscal coverage. The implied adjustment of the primary balance in 2000, under comparable definitions for 1999 and 2000, is about 1½–2 percent of GDP, returning Korea to a position of primary surplus.
Social safety net	The Korean government has begun to move social safety net spending away from government-financed direct provision of employment toward a system of "productive welfare." To this end, as of October 1, 2000 the National Basic Livelihood Security Law will become effective and will: Unify safety nets under one means-tested umbrella that will secure a minimum standard of living for all Koreans while providing incentives for a return to the workplace for those able to work; Increase the number of recipients of subsistence benefits from 0.5 million in 1999 to 1.5 million in 2001; Establish a self-support plan for those able to work through provision of job search information, vocational training, and day care services; Improve the targeting of livelihood protection benefits and customizing the size of benefits to the size and demographic characteristics of households; Secure basic subsistence living for the elderly by increasing the number of beneficiaries and the size of the noncontributory social pension as well as providing free meals and in-home care to those in need. In addition, the elderly will be offered assistance in their out-of-pocket medical expenses; and Increase the number of social workers per recipient household and improve the information database on recipients.
Medium-term fiscal program	In light of the continued strong economic recovery, the timetable for achieving a balanced budget will be advanced by a year to 2003. A revised medium-term fiscal plan will be prepared and published in the second half of 2000 reflecting the more rapid fiscal consolidation.
Privatization	The government is proceeding with its plans to privatize state-owned enterprises in 2000 as follows: POSCO: Shares owned by KDB (9.84 percent of total shares) will be sold in the foreign and domestic market, and privatization will be completed in 2000. Korea Heavy Industries: Divestiture is envisaged for 2000 through strategic alliances and IPOs. KEPCO: Generation operations will be separated from KEPCO and divided into several power generation companies, and the privatization of these companies will start this year. Korea Telecom: The government will reduce its share from 58.4 percent to 33.4 percent through strategic alliance and public sale in the domestic or foreign markets. Korea Tobacco and Ginseng: The government plans to reduce its shares in the company including by issuing depository receipts in foreign stock markets. Korea Gas: The government shareholding ratio will be reduced by issuing new shares in 2000. The restructuring of the company will generate 3 subsidiaries in 2001 and it will be privatized thereafter.
Report on the observance of standards and codes	The government is preparing, in consultation with the IMF, the Fiscal Transparency Module and the Statistics Module of the Report on the Observance of Standards and Codes. The government plans to publish these modules by the end of 2000.

Financial Sector Restructuring 1/
Type of measure	Measure	Timing
Banking system strategy	In order to facilitate the creation of financial conglomerates, the government will submit legislation on the establishment of financial holding companies. The legislation will ensure that the FSC is able to exercise effective consolidated supervision of FHCs and their subsidiaries, including requiring that minimum capital standards and large exposure limits are observed on a consolidated basis. FHCs' subsidiaries and affiliates will be limited to financial institutions and businesses closely related to them. The legislation will also ensure that the creation of FHCs cannot be used to avoid the limitations on shareholdings in banks.	September 30, 2000
	The KDIC has reviewed the Deposit Insurance Scheme ahead of the switch to limited deposit insurance once the blanket deposit guarantee expires in December 2000. The KDIC will adjust premium rates to ensure a build-up in the insurance funds so that they cease to be dependent on government support. The long-term aim will be to ensure that the cost of insurance falls on insured financial institutions rather than the taxpayer.	December 31, 2000
1/ These measures have been formulated in close collaboration with both the IMF and the World Bank.

Financial Sector Restructuring
Type of measure	Measure	Timing
Government-owned commercial banks	The government is committed to the withdrawal of its involvement in the commercial banking system that resulted from the 1997 crisis. To this end it will announce a strategy to include the following elements: (i) further efforts to strengthen market confidence that the banks' accounts reflect the full extent of remaining asset quality problems, particularly in regard to restructured loans and exposures to work-out cases; (ii) the redemption of government owned preferred stock, provided that the banks maintain the adequacy of their capital; and (iii) a statement that the government intends to start sales of its majority stakes in the large corporate lending banks, specifically Chohung Bank, Hanvit Bank, and its minority stakes in Korea First Bank and Korea Exchange Bank, once these banks have had an opportunity to demonstrate an ability to earn an attractive return on equity.	July 15, 2000
	The new management of Seoul Bank will, on the basis of the review currently being conducted by Deutsche Bank, prepare the bank for privatization.	Ongoing
	While under government ownership, the banks will be operated on a fully commercial basis and the government will not be involved in their day-to-day management.	Ongoing
Commercial and merchant banks	All banks will be required to meet at least the minimum capital ratio of 8 percent and encouraged to increase their capital ratios to 10 percent by December 2000.	Ongoing

Financial Sector Restructuring
Type of measure	Measure	Timing
Use of public funds for financial sector restructuring	The government will ensure that sufficient public funds are allocated for the purpose of financial restructuring, by ensuring that KAMCO (Nonperforming Assets (NPA) Fund) and KDIC, have adequate resources. It will do so by (i) recoveries by KAMCO (NPA Fund); (ii) the proceeds of sales of KDIC-owned shares in financial institutions and other assets; and (iii) the issuance of asset-backed securities. Only if the revolving process is not sufficient for future needs even after the two agencies' own efforts and financial institutions' self-rescue, will the government seek additional borrowing authority from the National Assembly. The government will also ensure that the two agencies' activities and the government's support of them are fully transparent.	Ongoing
	Public funds should only be used to the extent necessary to facilitate the liquidation of failed institutions and the restructuring of weak but viable banks. Restructuring which involves the use of public funds should be limited to:	Ongoing
	Private sector recapitalization and mergers approved by the FSC, where there is adequate burden sharing, which would be expected to involve contributions of capital from existing or new shareholders, and/or other stakeholders; or Purchase and assumption (P&A) transactions; or direct recapitalization by the government with full write down of shareholder capital and replacement of management, in exceptional cases and where a bank is of systemic importance.
	In order to enhance the incentives for banks to participate fully in the corporate restructuring process, no public funds, whether by way of KAMCO (NPA Fund) purchases or capital injections or other means, shall be made available to banks which are not certified by the FSC to be performing their role in the corporate sector restructuring process.	Ongoing
Restructuring of investment trust companies (ITCs and ITMCs)	The government will prohibit any new investment in funds, other than money market funds, which are not marked to market.	July 1, 2000
	As the average maturity of assets in money market funds is short and as funds may only be invested in investment grade marketable securities, price fluctuations are limited. Money market funds exceeding W 10 billion are subject to annual external audits. The market value of assets in MMFs will be reported to the FSC on a quarterly basis.	Ongoing
	The FSC will continue to encourage IT(M)Cs to reduce investments in existing "book value" funds so that the remaining amounts become minimal by the end of 2000.	By December  31, 2000
	IT(M)Cs will be required to report quarterly to the FSC the market value of all funds under management.	From July 1, 2000
	Proposals for the management and return to the private sector of the business of Korea Investment Trust and Daehan Investment Trust will be prepared. While the government retains a shareholding, it will ensure that the companies are managed on a sound commercial basis.	September 30, 2000
Governance and supervision of IT(M)Cs	In accordance with the revised Securities Investment Trust Business Act, IT(M)Cs will be required to appoint compliance officers to ensure that managements act in accordance with their responsibilities to investors. IT(M)Cs managing funds in excess of W 6 trillion (which account for 75% of funds under management) will be required to appoint non-executive directors and audit committees, and smaller companies will be encouraged to adopt these measures on a voluntary basis.	Ongoing
Governance and supervision of IT(M)Cs (concluded)	The FSC will use its powers to minimize potential conflicts of interest between IT(M)Cs and related companies and will penalize trustees which fail to undertake their responsibilities to require managers to act solely in accordance with investors' interests. IT(M)Cs will be required to disclose to investors the investment guidelines and strategies under which specific funds are managed, as well as market valuations of marked-to-market funds. The FSC will encourage independent evaluations of managers' performance to be made available to investors, and require that annual external audits of individual funds be provided to investors.	Ongoing
Restructuring of life insurance companies	The FSC will proceed with the restructuring of Korea Life with a view to privatizing it.	Ongoing
	All life insurance companies, except those which submitted rehabilitation plans in 1998, are required to meet the announced EU solvency margin requirement to be phased in over the period September 1999 to March 2004.	Ongoing
	Companies which submitted rehabilitation plans in 1998 are required to meet the same EU solvency margin requirement by December 2000.	December 31, 2000
	Insurance companies which fail to meet the required solvency margin thresholds will be subject to Prompt Corrective Action.	Ongoing
Investment guidelines for insurance companies	Insurance companies are allowed to hold no more than 30 percent of their assets in equities. Risk concentration rules to limit exposures to single issuers/borrowers will be enforced.	Ongoing
	Insurance companies will be prohibited from holding more than 15 percent of their assets in real estate and more than 5 percent in any one property. Companies with single properties in excess of 5 percent at end-June 2000 may retain such assets, but not acquire new assets that will raise their holdings in any one property above 5 percent.	June 30, 2000
Investment guidelines for insurance companies (concluded)	Insurance companies will limit loans to non-policy holders to 40 percent of total assets, and over time will reduce this proportion. Such loans will be subject to the same loan classification and provisioning as commercial banks.	July 1, 2000

Prudential Regulations and Supervision
Type of measure	Measure	Timing
Financial transactions between affiliates	The FSC has reviewed all bank and non-bank financial institutions' legislation and regulation regarding transactions between affiliated companies and their shareholders.	Ongoing
	The underlying principles enshrined in legislation, regulations, and supervisory practice, will ensure that: All lending to shareholders and affiliated companies is done on an "arm's length" basis, is a prudent use of the lending institution's resources, is performing, and can be shown to have been done on market terms and conditions. Transactions between proprietary funds and funds managed for customers are prohibited, and financial institutions may not pledge such funds as collateral. Financial transactions between affiliated companies, or between institutions and their shareholders, are confined to transactions in assets for which readily ascertainable market prices exist, and at market prices. All related party transactions will be disclosed in audited accounts and reported to the FSC, to shareholders, and to the beneficial owners of the funds.
Prudential regulations for commercial, merchant, and specialized and development banks	The FSC will continue to update its regulations and procedures to bring them closer to international best practice as expressed in the Basle Committee's Core Principles, and in codes of best practice published by other international supervisory bodies.	Ongoing
	The FSC will ensure that restructured claims, including claims restructured through workouts, are adequately discounted to reflect the terms of the restructuring, and are then adequately provisioned in accordance with the "forward looking criteria" so as to reflect the weaknesses that gave rise to the need for restructuring, and any doubts that remain about the ability of the borrower to perform under the agreement. Any additional provisions should be made no later than end-December, 2000, and, for merchant banks alone, no later than end-March 2001.	Ongoing
Prudential regulations for commercial, merchant and specialized and development banks (concluded)	Equity and convertible debt issued in exchange for debt will be valued conservatively, taking into account any restrictions on sale and marketability.	Ongoing
Specialized and development banks	Issue regulations to update the prudential rules for specialized and development banks and systems for reporting to the FSC on the same basis as commercial banks.	July 15, 2000
	Specialized and development banks will publish accounts on a fully consolidated basis, consistent with accounting standards for commercial banks. These accounts should be externally audited by recognized accounting firms.	Ongoing
Large exposures	Exposures of commercial banks, merchant banks, and specialized development banks in excess of the new 20 percent and 25 percent limits will be subject to progressive reduction over the agreed timetables.	Ongoing
	In addition, the aggregate of exposures in excess of 10 percent of total capital will be limited to 500 percent of capital.
Disclosure, auditing, and accounting standards	The MOFE, the FSC, the Korean Accounting Standards Board, and KICPA will continue to improve disclosure, auditing, and accounting standards to ensure that Korean practices are fully consistent with International Accounting Standards and that any areas in Korean standards that warrant further improvement are dealt with.	Ongoing
	Reporting requirements for banks will continue to be improved, in order to strengthen the ability of supervisors to be forewarned of potential problems. In particular, losses incurred by banks including in debt restructuring must be recognized at the time of restructuring.

Prudential Regulations and Supervision
Type of measure	Measure	Timing
Public guarantee funds	At least 20 percent of the new guarantees, including rollovers, issued by Korea Credit Guarantee Fund and Korea Technology Guarantee Fund will cover only 80-90 percent of the value of guaranteed obligations depending on the credit rating of the firm. This trend toward providing only partial guarantees will continue such that by end-2000 all new guarantees issued will cover only 60-90 percent of the value of guaranteed obligations.	Ongoing

Trade and Capital Account Liberalization
Type of measure	Measure	Timing
Foreign exchange liberalization	A revised foreign exchange law came into effect on April 1, 1999, at which time a first stage of liberalization measures was implemented. Implementation of the second stage, planned for the end of 2000, will result in the liberalization of capital and financial account transactions that remained restricted after the first phase, with certain exceptions that take into account progress made in strengthening the domestic financial system and the regulatory regime. Important liberalization steps in the second stage include the liberalization of nonresidents' short-term domestic deposits and residents' overseas deposits; the liberalization of nonresidents' foreign currency denominated loans from residents; and the elimination of the real demand principle for spot transactions. Restrictions that are currently planned to be maintained include: restrictions on won currency funding of nonresidents; restrictions on short-term borrowing by financially unsound corporations; eventual repatriation principle of external claims; and safeguards and monitoring systems on the foreign exchange and financial markets.	January 1, 2001

Corporate Restructuring 1/
Corporate Restructuring Agreement (CRA) Workouts	To move beyond an emphasis on financial stabilization of workout companies and achieve both sufficient operational restructuring and sustainable capital structures at these companies: The FSS will require that creditors effectively monitor the implementation of workout MOUs (e.g., plans for asset sales and operational restructuring, cash flow projections) through the proposed term of each workout. The FSS will enforce guidelines for cases where a workout company fails to meet business performance or "self help" targets specified in its workout MOU. In such cases, guidelines require creditors to replace management, suspend additional financing or credit concessions, negotiate another workout, petition for court-supervised insolvency, or sell their interests in the company.
Resolution of Daewoo	The FSS will ensure that financial institutions move beyond the financial stabilization of Daewoo affiliates and accomplish the following: Timely and transparent sales and spinoffs of designated affiliates. Closures and liquidations of non-viable businesses. Other necessary operational restructuring and full implementation of workout MOUs.
Top 4 Chaebols and General Chaebol Reform	The FSS will carefully review the consolidated and combined financial statements for 1999 that will become available in July 2000 (and thereafter on a regular basis). These reports will provide useful new information for assessing the overall financial structure of the top chaebol. Creditor financial institutions will additionally consider these reports when they classify loans to affiliates of the top chaebols. Compliance of these consolidated and combined financial statements with the revised and upgraded Korean accounting and auditing standards will be reviewed and available remedies pursued against companies and auditors found to be in noncompliance.
1/ Measures in the area of corporate restructuring have been formulated in consultation with the World Bank.

Corporate Restructuring
Top 4 Chaebols and General Chaebol Reform (concluded)	The FSS will provide guidelines to banks on credit evaluations for Top 30 chaebols based on indicators including interest coverage, profitability, ratio of short-term borrowing, and debt/equity ratio, and on semi-annual reviews based on the balance sheet statements for all nonfinancial affiliates. Monitoring will also cover progress in achieving a greater focus on core business. A capital structure improvement plan (CSIP) will be required for a group if the group (i) shows a liabilities/equity ratio above the agreed benchmark; (ii) shows a below-average credit evaluation; or (iii) fails to keep commitments to creditors or suffers a large loss. Monitoring and enforcement of CSIPs will adhere to FSS guidelines in effect at end-1999, including enforcement of corrective actions by financial institutions in the event of chaebols' noncompliance with CSIP commitments. These actions may include mandated exits, petitions for court-supervised reorganization or bankruptcy, or workout.
	The FSS will continue to enforce ongoing programs to reduce financial institutions' exposures to single borrowers and groups and to limit connected lending. Requirements for financial disclosure will be strictly enforced to impose greater financial discipline.
	The FTC will fully enforce the major legislative and regulatory changes adopted over the past year to promote competition and fair business practices--strengthened Fair Trade Act, M&A rules, Act on Regulation of Cartels, rules against non-arms length intra-chaebol transactions, enhanced FTC investigative and sanctions powers. Efforts to strengthen FTC's institutional capacity to apply the enhanced legal provisions will continue.
Valuation and provisioning of restructured debt	To encourage creditor groups to sell and otherwise accelerate the disposition of their interests in workout companies, the FSS will require that financial institutions apply standard forward looking classification and provisioning criteria to the loans of workout companies (to be effective from December 31, 2000, and for merchant banks alone, from March 31, 2001). The temporary rule requiring provisioning of only 2-20 percent for such loans will be ended. Equity and convertible debt issued in exchange for debt will be valued conservatively, taking into account any restrictions on sale and marketability.

Corporate Restructuring
Corporate restructuring vehicles	The MOFE will, by July 31, 2000, submit legislation to the National Assembly enabling the creation of corporate restructuring vehicles (CRVs) to manage the converted equity, CBs, and restructured loans of companies that have undergone CRA workouts, requiring that asset management of any CRV be controlled by an asset management company (AMC) which consists of experienced turnaround professionals.
Court-supervised insolvency framework	The legal framework for court-supervised insolvency was improved through amendments to the Bankruptcy, Composition and Reorganization Laws adopted in December 1999 which, inter alia, included the following changes: requiring the court to rule on a reorganization or composition petition within one month; imposing mandatory liquidation where reorganization is unsuccessful; reducing the proportion of creditors required to approve a reorganization plan; strengthening the right of avoidance of preferential transfers; and permitting merger and divestiture as part of the reorganization process.
	The government will seek further modernization and harmonization of the laws for bankruptcy, composition and reorganization based on the recommendations of the review of the insolvency system supported by the World Bank Technical Assistance Loan. The introduction of "pre-packaged" reorganization procedures under the Corporate Reorganization Law is under review, including harmonization of such procedures with the Korean legal system.
	The government will review capacity constraints of the bankruptcy division of the Seoul District Court and consider expansion of its capacity as necessary.
Corporate governance	To promote effective monitoring of corporate performance, a Code of Best Practice for Corporate Governance has been issued by the Committee on Corporate Governance. Listed companies have been required to report publicly at least annually on their compliance with this Code.

Corporate Restructuring
Corporate governance (concluded)	Amendments to the Commercial Code and the Securities Law passed in December 1999 enacted further improvements in corporate governance, including requiring that at least 50 percent of the directors on boards of large companies be outside directors and the establishment of audit committees of boards of directors in lieu of statutory auditors.
	Building on the progress made to date, the government is reviewing proposals for further actions, based on the recommendations developed under the World Bank Technical Assistance Loan, including measures to (i) enhance the role and improve the functions of corporate boards, and (ii) strengthen minority shareholder rights.
Financial transparency and accountability	Substantial progress has been made in improving standards and the regulatory and institutional framework for accounting, auditing and financial disclosure. The policy agenda to build on this progress includes, inter alia, the following elements:
	Follow up the issuance of improved accounting standards in 1999 with further improvements to ensure that all accounting standards are consistent with International Accounting Standards and develop more detailed operating guidelines to provide adequate guidance to practitioners in the application of these standards. To improve the quality of financial reporting and audits, strengthen the disciplinary procedures for imposing sanctions on management of listed companies for preparation of false or misleading financial statements. To improve the financial oversight role of boards of directors and enhance the effectiveness of the audit function, ensure compliance with the recently instituted requirement for listed companies to establish audit committees of boards of directors.

Structural Performance Criteria

December 31, 1999

1. Performance criterion: By December 31, 1999, FSC to have completed a study of reserving by life insurance companies.

Status: The study was completed on December 10, 1999.

2. Performance criterion: By December 31, 1999, FSC to have brought into force new classification and provisioning requirements for commercial banks, and for specialized and development banks that are based on forward looking criteria that reflect capacity to service all obligations.

Status: Became effective on December 31, 1999.

January 31, 2000

3. Performance criterion: By January 31, 2000, consistent with the underlying legal framework, issue regulations to update the prudential rules for specialized and development banks and systems for reporting to the FSC on the same basis as commercial banks.

Status: The relevant decree was revised on March 4, and the supervisory code will be revised by July 15, 2000.

March 31, 2000

4. Performance criterion: By March 31, 2000, the FSC will issue minimum guidelines regarding corporate governance for insurance companies, which will include appointing nonexecutive directors to the board of directors, establishing an audit committee of which at least two thirds would be nonexecutive directors, and establishing risk management committees.

Status: The FSC recommended guidelines to MOFE regarding corporate governance for insurance companies on March 16, 2000; the implementing Presidential decree became effective on June 23, 2000.

5. Performance criterion: By March 31, 2000, the FSC will issue regulations requiring ITCs and ITMCs to appoint nonexecutive directors, disclose investment guidelines and strategies to investors, to have investment funds subject to external audit, and introduce penalties on trustees that fail to observe their obligations to investors.

Status: The regulation concerning the IT(M)Cs are in the Security Investment Trust Act, which was passed on January 21, 2000; the implementing Presidential decree became effective on June 23, 2000.

September 30, 2000

6. Performance criterion: To ensure that financial statements of financial institutions fully reflect their underlying asset quality, the FSC will issue instructions by September 30, 2000 that financial institutions must classify restructured loans, including loans restructured through workouts, on the basis of forward looking criteria (FLC). These instructions will also indicate that any additional provisions required by the application of FLC for restructured loans must be booked by all financial institutions (except merchant banks) no later than December 31, 2000. Merchant banks must fully provide by the year ending March 31, 2001. This would terminate the temporary rule requiring provisioning of 2-20 percent for restructured loans.

Monetary Sector
Outstanding Stock as of:	Limit (In billion won)
Net domestic assets End-December 1999
Performance criterion Actual 1/	-47,917 -51,932
End-March 2000
Performance criterion Actual 1/	-54,642 -67,114
End-June 2000 2/	-70,395
End-September 2000 3/	-71,794

1/ With net foreign assets valued at program exchange rates.
2/ Indicative limit.
3/ Performance criterion.

Net domestic assets (NDA) is defined as the difference between reserve money and the won equivalent (converted at the program exchange rate) of net international reserves (NIR) as defined in the program. The NDA taret will be adjusted down by the amount of any upward adjustment to the NIR target, made necessary by an increase in the net forward position over the end-May 2000 level.

Net International Reserves of the Bank of Korea
	Floor (In billion U.S.dollar)
End-December 1999
Performance criterion Actual	62.4 67.2
End-March 2000
Performance criterion Actual	66.8 77.6
End-June 2000 1/	81.0
End-September 2000 2/	84.0

1/ Indicative floor.
2/ Performance criterion.

Net domestic assets (NDA) is defined as the difference between reserve money and the won equivalent (converted at the program exchange rate) of net international reserves (NIR) as defined in the program. The NDA taret will be adjusted down by the amount of any upward adjustment to the NIR target, made necessary by an increase in the net forward position over the end-May 2000 level.

For monitoring purposes, net international reserves (NIR) of the Bank of Korea (BOK) is defined as the U.S. dollar value of gross foreign assets in foreign currencies minus gross foreign liabilities.

Gross foreign assets will include all foreign currency denominated claims, including monetary gold, holdings of SDRs, and the reserve position in the Fund. Excluded from gross foreign assets will be participation in international financial institutions, as well as holdings of nonconvertible currencies, claims on residents, and deposits of the BOK at overseas branches and subsidiaries of Korean banks. Gross foreign liabilities are all foreign currency denominated liabilities of contracted maturity up to and including one year plus the use of Fund credit. All assets and liabilities will be valued at program exchange rates.

The net forward position is defined as the difference between the face value of foreign currency denominated BOK off-balance sheet (forwards, swaps, options, and any futures market contracts) claims on nonresidents and foreign currency obligations to both residents and nonresidents.

The floor on NIR will be adjusted upward for any increase in the net forward position over the end-May 2000 position of $1.7 billion (all of which are swaps).

Fiscal Sector
	Ceiling (In trillions of won)
Cumulative deficit from January 1, 2000 to end-March 2000
Program 1/ Actual	3.9 -5.7
Cumulative deficit from January 1, 2000 to end-June 2000
Program 1/	6.9
Cumulative deficit from January 1, 2000 to end-September 2000
Program 1/	10.3
Cumulative deficit from January 1, 2000 to end-December 2000	13.7

1/ Indicative ceiling

The consolidated central government overall deficit is defined as the consolidated balance of the central government (comprising the general account, the special accounts, and the special budgetary funds) and the public enterprises special accounts.

The consolidated central government overall deficit is measured through the government treasury accounts. It is defined as the change in the central government deposits and the treasury cash with the BOK, plus the change in deposits with commercial banks and nonbank financial institutions, plus the change in central government bonds outstanding, plus foreign borrowing by the government. For program purposes privatization is included in the deficit as negative net lending