PROCEEDINGS

MR. CONSTANTINE: Okay. Thank you for coming. My name is Mark Constantine, and I'd like to first of all express our appreciation for pulling yourselves in from a lovely day outside, and also being able to distinguish between what is Daughters Day in the World Bank and the other events going on.

Joining me on the podium here is Khanh Nguyen, if I'm pronouncing your name more or less correctly, Javed Hamid, and Sami Haddad, and they will collectively, through a brief opening presentation and then in answering your questions, try to give you a sense of the state of corporate restructuring in Asia as we see it from IFC's perspective.

Just one kind of stage-setting comment before I turn it over to Javed, and that is what I think is an important if not obvious point to make in terms of differentiating the crisis of the last couple of years in Asia, the disruptions that have not too long ago been evident in Brazil and elsewhere, and, say, the Latin American debt crisis of the 1980s, is essentially that the impact of that crisis--today's crisis is far more within the private sector than was the case in the 1980s, when essentially it was governments who owed to the commercial banks. And that is why what Javed is going to speak to you about and why we in IFC think is so critical about the corporate restructuring work that's going on now, because without it the implications for many, many otherwise viable companies and the many hundreds of thousands of people that they employ is quite severe.

Without further ado, let me turn it over to Javed.

MR. HAMID: Thanks, Mark.

We prepared some material for you, so that should help. We have a kind of statement which shows what we have been doing, also some press releases that we made over the last year or so which give a little bit of detail about companies we have assisted.

What I'll try to do is, one, I'll give you a very quick overview of where we see things at the moment, and that's from the private sector perspective, the IFC's perspective. It may be a little bit different from what other people may think, and it's for you to pick and choose. And then I'll quickly go over what IFC has done in the last, say, 18 months to respond to this crisis. And then finally as to what are the kind of lessons that we draw from this in terms of our work in the future. So it's kind of three parts. I'll try to keep it down, my talking, to a minimum so that, you know, we can answer questions that are of interest to you.

Starting with what is the state of play, we think that Korea seems to be coming out of the crisis. Their stock market has gone up quite dramatically. The forecasts that people are making of GDP growth during the year have entered the positive territory now, and people expect that it may be go to 2 or 3 percent, in fact, this year.

The reforms that have taken place have been most marked and noticeable in the banking sector where they shut down a number of banks, as you know, and then they have put in new regulations and supervision mechanisms to help deal with the sector and to supervise the sector, the banking sector. Now recently there's some new investments, foreign investments that have come into that area, and all in all there's a build-up of confidence that's taking place in the Korean economy.

There are a couple of things that are still to be watched, and I think the recovery is still in the very early stages. As you know, the unemployment is continuing to grow, and it will grow if the restructuring has to be done in earnest, and particularly if restructuring is done in the bigger chaebols. And the unions, which are quite strong and in the past have been quite aggressive in Korea, have accepted so far these layoffs and restructurings and unemployment that has been generated. But still they could become more strident, and that is the worry that is still there. And they are saying that next month they are going to have a strike action and all that sort of thing. So let's see what happens.

So far, the President of Korea has been able to handle the situation quite well, and he put pressure on the chaebols and put pressure on the unions, he has put pressure on everybody to try to hold the line and continue the reform process.

In Thailand, which is the other country where the reform process has been moving quite a lot, but recovery is in our view--maybe it's not started. Maybe the bottom is being approached, but the turn may not have come. Although people are starting to say that there will be some growth this year, maybe less than 1 percent, but there the state of the financial sector is still uncertain. The banks, their non-performing loans are still growing, and the restructuring of the banking sector has not really taken place in any significant way. There have been a couple of investments by foreign banks coming in, but it has not been as marked as it has in Korea.

Also, the corporate restructurings in Thailand have not started taking place as vigorously as in Korea. One of the reasons we think that this may not have happened is because of the bankruptcy laws in these countries and in Korea where the legal framework did not force companies to face up to the fact that they were insolvent and, therefore, the creditors could put them into bankruptcy. And that pressure was not there. They put in a new bankruptcy law in place, but still that has to be tested in the court systems and it has to be tried, and we are not sure that still it's strong enough to make the companies face up to the fact that they have to reorganize or go into bankruptcy. So this is in Thailand.

In Indonesia, my colleague will speak about Indonesia. He has just come from there and is more familiar. I will just say a word about the Philippines.

The Philippines was not so severely affected by the crisis in the first round, possibly because, one, the financial sector was better regulated. They had been receiving assistance from the Fund and the Bank in the regulation of their banks, and they have done a pretty good job. Therefore, they had more depth, strength in the banking sector. Also, it was not so exposed to short-term borrowing and mismatches of maturities as Korea and Thailand, and, therefore, there wasn't so much to go out.

So, as a result, the downturn was not so precipitous. But still they have had their problems, and they probably had little growth last year, and they expect very little, 1 percent or so growth this year. But still out of all the countries, the state of the economy in the Philippines is probably the most robust.

I'll ask Sami to say a few words on Indonesia, and then we can switch over to what we have done in the context of the crisis in the last 18 months.

MR. HADDAD: In Indonesia, it is possible to see a bottoming-out of the severe depression that the economy has witnessed this year, but the big unknown is what will happen on the political front. As far as the banking system is concerned, it is still far from returning to a normal situation. The restructuring is still underway, and the effort required is massive.

On the institutional front, there is a new bankruptcy law, and this bankruptcy law is viewed as a significant step forward. And that's basically it.

MR. HAMID: We'll come back to this. We'll answer questions on the specifics, but let me just very quickly give you what IFC has been doing and complete the story.

Basically, IFC, as you know, was traditionally a project-financed institution and, therefore, it was used to lend long term for new investments, new capacity. But as a result, in this crisis, the need was not to create new capacity but to help companies meet the liquidity problem, the working capital requirements, and to help them restructure to get the balance sheet back into order.

So we changed our focus, and in the last 18 months we have really focused on trying to see how we can provide companies with liquidity and how we can help them to restructure. So this has been our main thrust. And we have tried to do this in several ways. We first of all have tried to help the banks restructure and do one or two model transactions which would bring confidence into the system and also set up some models which others would emulate, and also to give them technical assistance and to help improve in their risk management and their credit analysis and just operating policies, and then the disclosure and their sort of operating on international best practices. And there are some examples I would like to give of what we have done in that area.

Then we have also tried to provide liquidity to the systems, getting into some trade finance kind of activities, which was not our normal way of doing things, and we were quite successful in that area.

Now we are focusing on further institution building in the financial sector in particular because we realize that in most of these countries the financial sector is not very deep. It is just as the banking sector, but then the capital markets are not well developed. And, therefore, savings which are very high in the economy don't get allocated to the right--to the most profitable places.

And in the last 18 months, we have helped 60 companies to restructure and we have invested in them, and we put in about $1.6 billion of new investment. And these 60 companies that we've helped may be new companies or are portfolio companies, and this is one of the handouts that you have, so you can refer to that. And if you are interested in some particular transaction, we can talk about it.

We are also currently working on four restructurings--big, quite large restructurings in Thailand and three or four in Indonesia, and some of them are coming close to completion.

Now, in the handout, there are specific--I won't go over these, but there are specific cases. For example, in the Philippines, we have given you a couple of cases of a bank that we've helped to strengthen and recapitalize and we have put financing in that and technical assistance; a paper company we have helped to restructure, which is quite a large company, which ran out of--which had borrowed short and it had made new investments, and we have helped to restructure the balance sheet to provide them liquidity.

In Korea, for example, in the last 15 months, we have helped 20 companies with a total investment of $540 million. In this there were two banks, the Hana Bank and KLB. We went and invested in these banks and gave them technical assistance at the height of the crisis when the risk was very high, the middle of last year, and that helped to bring a lot of confidence into the system and helped to stabilize, we think, some of the banks. And also it gave the government a yardstick with which to sort of supervise other financial institutions, and also this became kind of a model for others to emulate. So it had a very powerful kind of demonstration effect in the system.

In Korea, we did three trade enhancement facilities. One was with Sumitomo Bank for $100 million. What had happened in Korea was--and, indeed, all these countries--that letters of credit established, opened by companies with local banks, domestic banks, were not being accepted by foreign banks, and, therefore, trade could not take place. And so we went in and said that we will guarantee, partially guarantee these letters of credit. And, therefore, in that way, foreign banks would come in with the rest of the guarantee, and they became acceptable for other foreign banks to accept. Therefore, this was an important lubricant for trade to take place.

As I said, in the next--where we are now is that we are now looking at several transactions which would help to deepen the financial sector. For example, we have helped to establish a brokerage company in Korea which is based on best practices. We have helped to establish the first joint venture mutual fund, again, to help the mutual fund industry to develop and, therefore, allocation of savings to the right uses.

And my colleague will you tell you a couple of things that we may have--that we have already done in Indonesia, but before I hand over, this is all material that you have, and we can refer to the specifics of all the facilities, trade and finance facilities, et cetera, are described in this thing.

There is one big investment that we are at the moment in the process of sort of closing, and that is a regional restructuring fund. It is called the Asia Opportunity Fund, and it will close at $750 million, and it's being marketed at the moment. And, therefore, I'm not really at liberty to tell you very much about it because that's a requirement of the U.S. securities laws. All that I can tell you is that it is to be managed by Chase Capital Partners, and IFC would invest $100 million in this fund. And the overall size of the fund will be about $750 million to $1 billion.

The thrust of it would be to invest in companies which are willing to restructure, to provide them with equity, and then also to provide them with management and technical assistance to upgrade to best standards and competitive standards.

I would like to close my statement just by saying, What are the lessons in this for us from the crisis? And the first thing that we concluded from this is that transparency--everybody talks about transparency, and, therefore, it's nothing new. But I think it's important to understand what it really means. And it's two things. It's as to what information is being disclosed by companies and what capacity do they have to disclose good information, that is, what kind of auditing standards are there and what kind of regulatory requirements are there. And this is the whole framework of what kind of information is coming out, and it's become apparent that having good information, without that one can walk into many traps.

The second thing is to have a common language of the disclosures, and, therefore, it's important to have some kind of international standards against which you can measure the information that is being provided. And this was very confusing when people said that, you know, the statements were being audited by the big companies and, therefore, how come they didn't disclose all these things. It was because they were reporting on the basis of standards of that country, whatever the regulators required. And, therefore, regulators require differently, define differently.

For example, a non-performing loan in Thailand was a loan that had not paid for two years by a bank; whereas, in another place, in normal standards, any loan that is non-performing for 90 days has to be fully provided for. So, therefore, there was a complete disconnect. When people looked at provisions, they didn't realize that this was being provided on the basis of a different kind of standard. And so the language was the same, but the basic things were not the same, and, therefore, there was just a great deal of just misinformation in that sense. Therefore, this is a very important thing that came out.

The second important thing that comes out is corporate governance, and this is, again, very important. A lot of companies in these countries, on the board of directors--they have boards, but who sits on those boards? It's people who manage those companies or simply the owner, then the representative in some way, and the other shareholders don't really have representation, meaningful representation on the board.

Also, the role of the board, and, again, it wasn't clear, and the role of the board was maybe simply to rubber stamp whatever the management was doing; whereas, the role of the board should be policy and the management should execute. So, therefore, to build these things is very important and be able to focus on how to help build these kinds of ways of management and governance.

Also, issues of cross-guarantees, related party transactions, and also the role of the--the disciplining role of the capital markets, because in these countries, as I said, capital markets are not very strong, and, therefore, they do not--the external pressure to go for corporate good governance and good disclosure is not there. And, therefore, we have to work on that kind of thing.

The third lesson we have learned and we will be working on is on regulation and trying to help the regulators put in place prudent regulations and then to help build up the capacity to regulate. You know, you can have the best regulations, but if the people who are supervising are not trained and they are not enough, they can't do what needs to be done.

These are the lessons that we have learned more on as we go to invest in these countries.

I will stop here and Sami may like to say a few words on Indonesia or we can just start with the questions and we can come back.

MR. CONSTANTINE: Why don't we go right to questions.

Yes, the second row.

MR. PULOSKI: Hi, I am Jeremy Puloski [?] with Bloomberg.

I wonder, you seemed to be rather pessimistic on Thailand and the restructuring that's going on there. It seems to be a theme that is emerging that countries are not moving forward now that there has been some recovery.

What are you all doing to sort of push these countries, specifically, to adopt the necessary reforms, and follow-through on them even as the emerging market climate appears to be improving? And how do you force that about?

MR. HAMID: Yes. On this particular thing, first of all, I think that I am not a pessimistic. I am just sort of saying where this things stand in our view. The reform effort has been very strong in Thailand at the policy level. So, therefore, they have done a terrific job at controlling the situation. It was kind of a free-fall and to turn it around is not so easy.

So, they've done a terrific job. But what I was saying was that the speed of recovery will depend on how quickly companies begin to restructure and the banking sector restructures.

And efforts in the banking sectors are visible. In the corporate sector we don't see that strong a movement at this stage. So, I just want to be sure that it's not that I am pessimistic. It is not--I am just saying how things look at the moment.

And part of the reason why it has not moved in the corporate sector is the pressure on them. There was pressure to reorganize from an economic side, but there was no legal pressure that sort of meant that there was a deadline for them to meet.

So, there is always a tendency for people to sort of say, well, maybe the problem has solved itself, maybe the economy will begin to pick up and I don't need to dilute my ownership. And, so, therefore, people tend to delay taking the hard decisions.

In Korea, companies were being shut down and, therefore, they had no option and then they were rushed out and tried to reorganize and restructure.

Here, in Thailand, the pressure was not there. They put in place a new bankruptcy law, which has gone into place only last month. And, so, let us see.

We still feel that there is more to be done for even that law needs to be further strengthened. The World Bank is working with the Thai Government and the IMF on these aspects.

But that's where things stand at the moment.

QUESTION: How do you encourage them?

MR. HAMID: Well, part of it is that the Bank and the Fund are working with the government on the bankruptcy law and the regulatory side, on also on forcing the banks to recapitalize and the Thai Government is stressing them that we should leverage them down if they don't do it.

Beyond that, what IFC can do is to bring some capital, equity capital, to bring some expertise in restructuring and to do some class actions which are model class action and to publicize them so others can see that this is happening and they would take them on.

And this is basically what we are trying to do at this moment. Beyond that, I don't know. Maybe Sami may have some ideas as to what--

MR. HADDAD: We are essentially a transaction-oriented institution. And it's, you know, we show the way by actually investing in certain things. But as Javed was saying, I mean IFC is a project-financed institution and given that this crisis, I mean, was very deep and affected so many countries we decided to do things that we normally don't do like trade finance; it is not something that IFC normally does. It is not in any of our expertise, but because there was a very serious shortage of capital that was hampering a number of corporate companies.

MR. HAMID: So, basically it was just that we tried to do new things. But that the willingness will have to be there within the system and we can be of assistance and we are ready to assist.

MS. NGUYEN: If I may, IFC is only one of the players in the scene. There are, obviously, the companies, themselves, the owners and the other lenders. And as long as the other parties are not quite prepared to take the reality bite, if I can put it that way, it is rather difficult.

We can try to convince and we continue to try to convince them but I think that we see more and more that as there is a seeming recovery on the economic front or the market front, market sector front there is a bit of more of a sitting back from many of these other players thinking that just a rescheduling of the debt is good enough.

And what we are talking about is a restructuring, a fundamental reorganization of the ownership structure, of the ways the business is carried out, of the asset vendor liabilities.

MR. CONSTANTINE: Yes.

QUESTION: Thank you.

Wall Street Journal.

I know that in Russia you did a fine job with actually getting the privatization blueprint, the process blueprints done. But then you began investing in stocks and you were not showing people the way you were actually competing with private sector investors. And I'm just wondering, looking at the list of restructurings here, these all sound like things that any private investment bank could come in and do where the project was worthwhile. Okay, this is my question.

And if it is worthwhile, it's hard for me to see a reason why they shouldn't just be getting a private firm to. If it's not then it would seem to me you are distorting the markets and trying to prop up exactly things that shouldn't be there.

My question is, what am I missing here? What are you offering that doesn't wreck markets and does do some good?

MR. HAMID: I think there are two things that come to my mind straight away and maybe my colleague can speak, as well.

One is the risk perception. You can go into a situation and assess risk differently or your appetite for risk. And, therefore, that may be different. For example, we invested in two banks in Korea, as I mentioned, and that was in June/July last year.

And nobody else was willing to invest at that time in Korea. People felt that Korea will maybe just completely fall apart or whatever reason. So, it's that thing that we--we, similarly, in during the restructurings that we have done it's that others were not willing to invest in those companies because that they felt that maybe the situation was going to get worse and they are not quite sure where it will end up. So, we were willing to take a view and take a risk.

The second, I think, element in this thing is that we have, even if I say it, ourselves, that we have a lot of experience in restructurings and in working in these difficult environments.

And, so, when you say that competitors and other private banks, as you know, they left these places in droves. And they were not sort of ready to come in and they are still watching as to what they want to do.

So, we are not stopping either anybody or competing with anybody. We just are stepping forward and saying we have to do some model class actions, show that the situation is complex but it still can be unraveled, with cross guarantees, related pocket transactions. High leverage, the 6-to-1 leverage, 7-to-1 leverage. People said, how do you de-leverage the situation?

We have de-leveraged a company which is what, which is 3 or 4 times, and allotted [?] to 50/50 but in this process we actually brought in some other equity players with us, who co-invested or invested at the same time.

So, I don't know what you can make of that but it is that it's part of our mandate to operate in these difficult environments. We are trying to do that. And once the environment becomes a little bit more certain then others will come in and we will relax it at that time and they will take over the staff. But at the moment they are not so anxious.

Maybe in Korea that begins to happen now and therefore we are not going to be doing very many more plain vanilla type of things. We may do some absolutely new institution building kind of transactions. We are not going to do very many of these restructurings.

QUESTION: There has not been a lot of evidence that the people in this building are deeply in touch with the actual intricacies of the systems they've been trying to fix.

And I'm just wondering why it is that the IFC is presumed to have a more competent staff in judging risk than anyone in the private sector? Aren't you really talking about simply using taxpayer money that funds you to subsidize given particular projects?

MR. CONSTANTINE: Let me just clarify one thing quickly and that is that we're not, actually we're only renting this building, this room and this building we are not living in this building.

But, yes, I don't think as Javed--and Javed has more expertise than I do--but I don't think that the issue is we have more expertise than people in the private sector.

As Javed has just said, I think the issue is that when the private sector, particularly say, the foreign investors and commercial banks become unsettled by events, as clearly occurred with currency meltdowns and the like in Asia, you know, our job is to be counter-cyclical, to be the first back in.

And I think that that is, I believe what he has tried to explain that we have tried to do through and in Korea, in the banking sector and so on and then basically turn market psychology around. Once that job is done, once we are no longer adding value, we get out.

But I don't think it's a question of us thinking we know much more than the private sector. That having been said, I will say that just as a matter of fact that the profile of staff in IFC is essentially and generally tends to be a business background. Many of the people who work here have come from other jobs within the private sector.

So, we learn by doing and both before in earlier lives and once we are here.

MR. HADDAD: Please, let me add one thing.

It's not that there is more competence or less competent. We probably are as competent. But the fundamental difference is that we are much more conservatively leveraged than most financial institutions that come to anybody's mind and we have a longer term perspective.

No urgency to realize short-term profits. That is mainly what distinguishes us.

MR. CONSTANTINE: Yes.

QUESTION: I may be wrong, but the trend seems to be--

MR. CONSTANTINE: Could you identify yourself?

MR. CARNARD: Mr. Carnard [?] Business Times, Singapore. The trend seems to be from the situation in the past where you used to take very small minority stakes in companies, you're now taking large stakes, either large minority stakes or even majority stakes in companies. And first of all, is this correct?

That seems to be the trend among a lot of equity players in Asia at the moment.

Secondly, I mean if you are taking large stakes, and, Ms. Nguyen says you are actually turning around or trying to turn around whole companies, are you able to do this? This is kind of following up the previous question.

Why are you taking these large stakes? Why do you see it as necessary to do this? Why is it happening in your industry, so to speak?

MR. HAMID: Well, we are not taking larger stakes than we were taking before, ourselves. You are absolutely right that private equity investors, who are investing in the emerging markets, feel that previously they were comfortable with having minority stakes, that it is probably prudent to have majority stakes and control. And, therefore, they are coming back in situations where they can get that.

But as far as IFC is concerned we are not changing our position. We don't manage anything. So, therefore, if you took a majority stake, what will we do with it because we are not in the managing positions?

QUESTION: Well, if it's prudent for them, wouldn't it be prudent for you?

MR. HAMID: No. Therefore, what we have to do is that either we bring in partners and they will manage and, therefore, they can take those majority stakes or significant minority stakes; or, we pick companies with very strong management which have a situation where their balance sheet has gotten out of whack simply because of the economic crisis and bad financial management but they are technically very competent, and, therefore, with some oversight from their board on which we would by just being equity holders would have a place, and governments through our loans can ensure that those situations can operate effectively.

So, we are not in terms of ourself taking a bigger stake, we have not changed our policy on that.

MR. CONSTANTINE: Here and then here.

MR. CASEY: I am Michael Casey from Dow Jones.

I wonder if you can give us an idea of how your investments, pre-crisis, have fared through that and what sort of an impact that had on your decisions post-crisis?

I know, for example, you had a stake in Astra, a big car maker in Indonesia, and that has had enormous difficulty restructuring and coming out of that. I am just wondering whether those experiences bred a certain conservatism and how it may have affected your decisions? And if you can give us an idea of what sort of losses you, in fact, incurred on those positions?

Thank you.

MR. HAMID: Do you want to handle that Indonesian situation?

MR. HADDAD: There is no doubt that this crisis has affected most of the companies in which IFC has invested. But it's also the case that some of the companies have survived very well and some of them are even thriving and being quite profitable.

In Indonesia, you mentioned Astra and we have, obviously, a large equity portfolio and that has been seriously affected. And we have, as a result, made significant provisions, both on the equity portfolio and on the loan,the equity portfolio provisions are around 50 percent.

MR. CONSTANTINE: We don't like to give specific country details in that regard. But, yes, go ahead, Sami.

MR. HADDAD: But the point is that these events make you try to learn the lessons but the lessons in this case are really, in most cases, macroeconomic rather than microeconomic. So, it is obviously easier to finance export-oriented companies with foreign exchange loans.

But this applies everywhere. So, it's an obvious lesson.

So these are the kind of things that we have learned, and we would be focusing more on and we take it conservatively. But I don't think that--the other main thing is the very importance of the financial sector in general, and that it is very important to make sure that most of the countries in which we work have a sound financial sector.

Now, our contribution has been to invest in the financial sector by setting up new specialized financial institutions, but the responsibility for the financial sector lies elsewhere.

MR. HAMID: Just to add from our experience in Thailand, for example.

First, one thing that I think all of us have learned is that this thing about being too big to fail is a myth and, therefore, you look at things more closely, irrespective of what kind of group it is and how large and basically how strong. You look at the basics of the situation more, and we are doing that in our assessments. But, also, it does make people more risk-averse, more cautious, let's say, in terms of the assessments. And so those lessons, we have also learned those lessons, and we are applying them.

But as my colleague was saying that we are somewhat of a, we're a long-term investor, and while we've asked--and yet our portfolio is affected in the same way as other people's portfolio, and we provide for, on our balance sheet, as soon as there is some weakness in a particular company or a particular situation. But we don't have a pressure and tendency to try to sell and get out, and therefore we will work on the situation, help to--we'll stay with it, help to restructure the company if the basic intrinsics are good.

And our experience in Mexico was that, for example, that we stayed with the situation, and the company finally came out of this crisis, and they did well, and we didn't lose any money.

And so some of the other financial institutions have a lot of pressure to actually just to get out, and take their losses and move on. We operate differently and, therefore, we expect that, once the situation, in a year or two years' time, that we will not have lost any significant amount of money in this crisis.

MR. CONSTANTINE: Let me just add just one final point on your question, which is that we acknowledged a loss in the first quarter of our fiscal year, being July 1 to September 30 of '98, and that was no secret here. It was based on the increased risk, higher chance of loss in Indonesia, Russia, Thailand and so on. That having been said, we expect to now--those were not losses, however. They were not realized losses, but the result of increases in provisioning--we expect to be in the black for the full year, which ends June 30 now.

And obviously, from a narrow standpoint, we therefore like the fact that many emerging markets are rebounding because we fold that back into our business. So, anyway, I just add that point.

Yes?

MR. CODY[?]: Hi, I'm Sheel[?] Cody from the South China Morning Post.

I'm quite keen to sort of try and get an update on your views on China because it's one of those places where the IFC has found that it hasn't needed to do too much work--there's a lot of private investors willing to get involved--but where there seems to be a lot of interest beginning to become a little bit cautious now on behalf of the private sector.

And I am wondering whether you feel that perhaps there's more work for you to be done there. We've just heard, overnight, that one of the biggest investment trusts--international trust investment corporations has revealed that it's really not going to be able to pay back its creditors at all, and that's going to have quite a severe impact on private investor sentiment into China.

So I was wondering if you could just tell us a little bit about if there is any kind of evolving stance on China and if you could just give us a bit more information about some of the project approvals that you have actually detailed in this table here, as well as the numbers.

MR. HAMID: Project approval for a particular country or the whole spectrum?

MR. CODY: For China.

MR. HAMID: For China.

On the details of the project approvals maybe we can go over that after our session because we have the information, and we can share that with you.

On just our stance on China, what do we think: Well, everybody is familiar with the weaknesses that sort of, you know, are in the system day-to-day. The financial sector is they have big state banks, they have a lot of nonperforming loans, they are state-owned enterprises that frequently have a lot of overemployment and, in many cases, technology is rather poor and in need of restructuring, and that domestic demand in the economy is soft at the moment, prices are, if anything, trending downwards and, therefore, there is a lot of pressure on the system.

There is deflation, there is a need to restructure, which would cause more unemployment, and if you don't get a lot of growth, then where do you take these people? And it is cause for concern for investors when you look at it, and we look at it, and we don't quite know where it's going to go.

On the other hand, China has maintained a very high rate of growth, and it's still maintaining a high rate of growth. It still came in at 7 to 8 percent last year, and they are expecting 7 to 8 percent this year. They put in a massive effort of infrastructure investment, which is to stimulate the economy, and they are making a very determined effort to strengthen the financial sector.

They have set up these asset management corporations. The first one I think has just gone into place, and they have capitalized it, and that would take over the nonperforming loans of I think the China Construction Bank, and that will clean up that bank, and then they'll make sure that those banks operate in using prudential policies.

They are also putting in place a five-tier classification system for the assets of their banks so that they start to move towards best international practices, and they are focused on deregulating the economy and on encouraging the private sector. It's only very recently that in the Constitution the first time they have recognized the role of the private sector, which was a major development that took place, and that's a signal that the Chinese government wants to encourage the private sector.

And that's where opportunities for institutions like IFC arise. The feedback that we have been getting from the Chinese government has been that they are keen for IFC to assist them in different areas, particularly in their efforts to open up the financial sector at least.

They want to move very cautiously and slowly. They have been chastened by this economic crisis in the sense that they feel that they have been saved from the crisis because they were not open and, therefore, it--and they don't want to expose themselves until their own institution is strong enough to withstand international ups and downs, volatility, and competition.

So they are going to move slowly. The indications are that they want private sector to get involved, and IFC is focused on increasing its activities in China, particularly in the financial sector.

MR. CONSTANTINE: Yes?

QUESTION: I don't want to trivialize by asking country-specific questions, but since Korea is one of the focal points in this issue, let me ask that question. I have basically three questions.

Since the kind of crisis, the Korean stock market has jumped from 280 to close to 750 now. It is almost a 200-percent increase. Some people believe this is overrated, and I would like to ask what is your assessment for the risk at this point in time. I think it is relevant for the foreign investors as well as the domestic investor.

Another one is, Mr. Hamid, you sounded like that unemployment is likely to increase once the reform is proceeded in honest terms. It means that you might imply that there may not be enough reform in the chaebol corporate sector reforms. So would you clarify your position, whether they are doing enough or what is the kind of things desired in the reform process.

And the banking sector has been recapitalized substantially by the government and by the inflow of foreign countries. You stated that you invested to banking sector, two companies, and before you make decision, you might have had the comprehensive analysis on the banking industry, in general.

How much do you think the recapitalization is required for the Korean banking industry gets to the stabilized status?

Thank you.

MR. HADDAD: Very difficult questions.

On the question of unemployment, what I was saying was that unemployment has been growing, and it will probably continue to grow until growth picks up, economic growth picks up.

Whenever there is restructuring in the economy, you are going to get some people being laid off, and then they can get picked up once the economy starts to move. So it's reached quite a high level. I think it was about 8 percent or something, 8/8.5 percent. This is a very high level for Korea because they have not experienced any unemployment for some time. So it is causing a lot of distress.

So I can't say whether it's reached a peak or whether it's going to continue to grow a little bit more, but it's certainly not sort of declining rapidly. So people who have been sort of, you know, have suffered, have put up, they had some savings, they had these things, but they may be running out of patience, and therefore there will be stress from that side.

But on the good side is that growth is beginning to pick up. Now, it was, as I said, 2 or 3 percent has been projected and maybe it will accelerate, in which case this problem may go away. But it certainly is something to watch.

On the chaebol, and the reforms and how they have reacted, difficult to read. We and IFC are not involved with chaebols.

We focused our attention mostly on the mid-sized companies and, therefore, we do not have that much firsthand insight into how much real restructuring they have done. On paper, they have moved a lot of assets around and done things. But people keep complaining in Korea and elsewhere that they have not done enough. So I am just echoing what I hear others, but I don't have really firsthand knowledge of the chaebols. But, generally, people are not happy with the amount of reform the chaebols have done.

In the banking sector, there are two things that are happening; one is the capitalization. New capital has come up, banks are profitable now. They are operating with relatively good margins, and that is generating capital, retained earnings, building up capital.

On the other side, the nonperforming assets are stabilizing or declining. Because as the economy begins to pick up, that part of it--earlier people thought that nonperforming loans would go up to something like 40 percent. Now, they are saying that they may stabilize around 28 percent. This is the latest that I saw. So, again, as the economy picks up, that is going to improve.

So what is the total amount of capitalization, that new capital is needed to bring all of the sector to a healthy state? It's difficult to call because it depends on all of these things that are happening. All I can say is that the banks now are in pretty good shape, and they have built up capital, they are profitable, and they have restructured, they have merged and become less bank.

The margins are good in terms of seeing the government forcing banks or directing banks to lend to certain, is no longer being done. So, therefore, they can take positions on the merits of the thing. So operating procedures are better.

So, on the whole, the banking sector is in better shape, but it's not completely out of the woods. It still needs to build up capital adequacy to international levels, and that will depend on their own efforts plus how the economy performs.

The stock market, if I knew, we would all be much better off. But it has gone up very rapidly, and anything that goes up that rapidly, you get more and more concerned. But I think there are a lot of concerned investors all over the world, including in the U.S., when the Dow keeps going up and they don't know what to do. So I don't know.

QUESTION: Don't you have any number for the recapitalization requirements for the Korean banking industry?

MR. HAMID: I don't know. There are lots of numbers that float around. It all depends on what assumption you make. So I don't have a good number that I can give you.

MR. CONSTANTINE: Yes, ma'am.

QUESTION: Sue Kendall from [inaudible] Press.

I'm just a little bit puzzled with this business of investing in corporate restructuring in these countries. I would like to know a little bit more about how you choose what companies are worthy of IFC investment to restructure, rather than being allowed to go to the wall. Could you go into a little more detail about that?

I mean, how do companies get to be "lucky", or "unlucky" and get this investment, while at the same time you're talking about the need for bankruptcy laws that allow companies to go to the wall and so on?

MR. HAMID: I think we have some criteria that we have used to screen and find companies that we would like to work with.

The first is that they would like to restructure, so they must be willing to get dilution of their ownership because that's what's going to happen. You have to bring in more equity. So there has to be a strong willingness to accept the recommendation that is inevitable. So that's number one.

Then we have tried to sort of list--and again, it's not completely comprehensive, but I can give you four or five elements that we look at, that the management is a strong management, technically good management, because when the IFC comes in, we cannot manage anything so we have to rely on the company that we're going to restructure, so they must have basically good management.

They should be in an industry which is going to do well and not a dying industry, so that the prospects are good.

We would like the company to be a competitive producer and, therefore, have the potential to be a competitive producer, that technically, possibly they are a competitive producer, but they need financial engineering to give them the wherewithal to be able to compete. So the underlying competitiveness of the company should be there.

Tim, what else?

MR. KRAUSE: I think that's a pretty good coverage of it.

MR. HAMID: We also look at the export potential, because we lend in dollars and we invest in dollars and we would not like to be mismatched; therefore, if it's a company in an export-oriented industry, that they've been exporting and have good potential for continuing to earn foreign exchange, so that they can match their livelihood.

So this is the kind of things we look for to fall into this category, and if they have a willingness, we will engage.

QUESTION: I'm sorry, but now I'm really confused. My gut reaction is to say, anybody who is thinking of investing money anywhere would want those conditions to be fulfilled, surely.

MR. HAMID: Right.

QUESTION: Why is the IFC in this as opposed to putting its money in other places? That's my fundamental question. It seems to me that that's what the money is going for, that the money is going where private money would be going normally in any case.

MR. HAMID: It's again the same question that we had earlier. The private money was not going into this situation. They left and said we'll watch from--we don't have an appetite for this.

Now, we don't want to invest IFC money and effort in situations which are not going to be commercially viable. So we have to pick and choose those situations where it's going to be successful.

Once we come in, then some other private money actually joins hands with us, because we feel that, given our kind of due diligence and this and that, that--so we have actually in all these cases brought other investors with us, more or less. We would say it's more or less always because the hole is so big that we can't fill it alone.

Does that help? I don't know if that solves-- MR. CONSTANTINE: Let me just add something, because I think you asked an interesting conceptual question, or philosophical question--how do we choose the lucky ones--and beyond the comments that Javed made, which are obviously quite on the mark.

I think firstly we are also focusing initially, particularly in the early days of the crisis, on our clients. That is not an understandable response, in the sense that--I mean, we had spent many months trying to help pull these deals together, to structure it financially, to do the right thing environmentally and everything else. So, you know, we don't want to throw that away if we can help it.

In so doing, I think another criteria perhaps, again accepting everything that Javed has said and what I just mentioned, is that you then, all things being equal, look for those opportunities where by doing it we can demonstrate and have a "knock on" effect in some highly visible way, as Javed said earlier.

You know, is there some magic formula we pull out of a hat? I'm not aware of one.

Dick, and then Eddie.

QUESTION: Dick Lawrence, with the Journal of Commerce.

What are you doing in Malaysia, if anything, and how do you assess the banking and corporate situation in that country?

MR. HADDAD: Malaysia has not been a very large country exposure for IFC in the past, and the reason is that Malaysia already had its own developed institutions and most of the potential corporate clients didn't think that they needed IFC funding. They found funding elsewhere. So it was a perfect case where, if there is funding available from the market, IFC need not be involved.

Now, again, even after the crisis, we are not seeing much demand for IFC funding. There has been some--there was some interest in IFC investment. There were a few projects that we pursued. Then the promoters themselves--in one case foreign promoters, and in another case local promoters--decided not to pursue their projects. So there is very little activity in Malaysia at the present.

But again, it goes back to many of the questions that were said earlier. There are no IFC projects. It has to be a private sector project that IFC is interested in, or asks the IFC for help. And even in these restructurings, in the Indonesia case, we have focused on our existing clients, and in all the cases of successful restructurings that have already closed, the main sponsors have been willing to put significant amounts of new equity.

IFC has also made a significant effort and has been able to mobilize additional efforts from lenders, co-lenders, et cetera.

QUESTION: So there is no obvious explanation of [inaudible] in Malaysia, so just interested in IFC assistance?

MR. HADDAD: I can again make a few suppositions. I mean, if you have in a country pre-crisis--the Malaysian financial system was pretty sophisticated and developed. Therefore, if you are a Malaysian corporation and you can fund yourself locally, and in local currency, why bother to go abroad? It's a very simple thing. It happens in quite a few countries.

In fact, there were quite a few Malaysian corporate entities that were co-investing with IFC and other countries, which is a sign of--you know. Now, after the crisis, for a number of reasons, the demand for IFC services has been very weak.

MR. CONSTANTINE: Eddie.

QUESTION: Teddy LaCheek [phonetic] of the Asian Wall Street Journal.

What is the situation with regard to the IFC's bankruptcy petition against Dharmala Agrifood, now that the Indonesian Supreme Court has reversed its earlier decision? Inasmuch as this case has drawn a lot of attention, what does the Supreme Court reversal say about the bankruptcy process in Indonesia?

MR. CONSTANTINE: I think the action of the Supreme Court speaks for itself. I wouldn't say we have a lot to add to it.

Obviously, we regard it as a major step forward, for the reasons Javed mentioned earlier, the importance of demonstrating that you can enforce a bankruptcy regime and that it works. We think that it will have very positive, longer term impacts in terms of helping to further build confidence in Indonesia's ability to turn around. But much more than that, we don't have to say. We think that the facts essentially speak for themselves in the case and that this obviously was the right outcome.

MR. HADDAD: I would like to add one thing.

IFC doesn't just, you know, lightly go through bankruptcy court. The key thing that we would like to emphasize is that in Indonesia, we are engaged in a number of restructurings. One has already closed and one is expected to close tomorrow. And two are basically concluded and the legal documentation is underway.

These have been closed because of very active, persistent, patient discussions with the lenders, with the sponsors, with everybody, on a voluntary basis--no bankruptcy, or so on.

Bankruptcy is a last resort. It's important to have because in certain cases there is no other way. But it is not, you know, the moment we have a problem, we run to bankruptcy court. It is really done in exceptional cases and the preferred mode is to settle things amicably.

MR. CONSTANTINE: Okay. These are the last two questions. They're both repeats.

QUESTION: I would like to ask a question that goes beyond Asia, if that's okay, and asking you to put on both your hats, as investors in the private sector but also government advisory roles.

In looking for a reaction to the proposals to changes to bond contracts, sovereign bonds that governments will be issued--Robert Rubin yesterday flagged it as a feature of the financial architecture restructuring program. But it is meeting with some opposition from private banks, talking specifically about clauses that delay or postpone specific creditors in rescheduling programs.

I'm wondering, from your perspective, where you sit on this issue, given that there seems to be a lot of reaction from the private sector.

MR. HAMID: It was in the Financial Times today, this commentary on it. We were discussing it a little bit before coming here. But I know very little about it and, therefore, for me to make any sensible comment is--well, it's not impossible.

One thing is, people say they need to have more information on what is out there and who is issued what and, therefore, some totals can be made and regulated in some way. But I don't know much about this thing.

MR. CONSTANTINE: I would just dodge as well, other than to say that I think just turning it back to IFC--I mean, if you look at fundamentally, one way to look at what we do, and it's relevant to the debate going on about how do you bring the private sector in and keep them engaged in, whatever you want to call it, make them pay or something, I think we're fundamentally a "bail in" of the private sector. That's exactly what our counter-cyclical role is about.

Yeah. Final question.

QUESTION: I was wondering if you could give us a sense of how big a player you are in Asia; that is to say, relative to the needs of Asian corporate restructuring, and also relative to other private equity players.

I mean, how much have they put in so far, other players, like yourselves, to the private sector, and how much have you put in, and how much do you think Asia would need over the next ten years or five years, whatever horizon you choose to restructure its companies?

Also, I understand, of course, that you mentioned you have a catalytic role; that is, you not only provide your own money but also catalyze others. Could you bring that in as well, and tell us how much impact you really have, actually, in terms of the total?

MR. HAMID: Well, I don't have the numbers in front of me to be able to say. Maybe my colleagues could. I have some people here who can help out.

But let me just say, look at it in a way, for example, what is IFC's investment in a year, and what is the total foreign direct investment in a year in a country. I think that misses the point as to what we do.

Our role and our sort of importance to the system is that we do things which others are not doing, for some reason or the other. If it's an institution building--for example, we set up the first credit reporting agency in the Philippines. It will not take much investment, just a few hundred thousand dollars. But it is a building block of the financial sector.

So what is the importance of that? It's a qualitative--or we make an investment in the banking sector in Korea, and it's a total package for the two banks, $200 million.

Now, in the context of either the size of these banks, or the total investment that may come in the whole year, that may seem very small. But at that moment of time, that is absolutely critical. Nobody else is investing in that particular sector. So it is critical to bring confidence, to bring some demonstration effect and to influence the system.

Therefore, just by looking at the total numbers, it may not really give you the answer that you are looking for, as to how important IFC is as a player. But in the last 18 months, I see it has been a very important player in Korea, for example. It has done a large number of cross-sections, across the spectrum, which has given rise to others to follow and do similar sort of things.

So in Korea, the perception of the marketplace is that IFC has led to a lot of confidence building, and its impact has been much more than the $500 million of investment that we may have directly made in the system.

That may be similar in Indonesia, where this restructuring is just starting, the six, eight or ten restructurings, and other people begin to move in to say that, you know, it's doable. The system works, and here are the examples. So that starts the ball rolling. So that is very important.

I think that's all I can say. But, Mark, you might have something to add to that.

MR. CONSTANTINE: That's a wrap, as they say. So thank you all for coming. Please feel free to follow up with us. We'll be hanging around if you want some additional information.

Thanks.

[The press briefing concluded at 3:18 p.m.]

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