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Economic policymakers warn of insolvencies

BOK Governor Lee Ju-yeol, left, and Finance Minister Hong Nam-ki
BOK Governor Lee Ju-yeol, left, and Finance Minister Hong Nam-ki

By Kim Yoo-chul

Risk asset prices have rallied due to unprecedented central bank and government measures, with the Bank of Korea (BOK) lowering its benchmark rate to a historically low level.

More precisely, market sentiment has seen a boost through swift and bold actions by the BOK and the country's top financial authorities aimed at addressing heavy market stress in the aftermath of COVID-19. But the BOK chief and Korea's top economic policymaker now warn of a possible disconnect between financial markets and signs of improvement in the real economy.

Their coordinated message follows a consensus that an increasing vulnerability, from the high-level debt standpoint, could pose an actual threat to recovery. In Korea, ample liquidity and growing debt, part of which stem from the government's continuous stimulus policies, may become "unmanageable" for the country's middle class.

In a New Year message to financial companies, Tuesday, BOK chief Lee Ju-yeol said the bank was expecting to see various "looming risk factors" from this year, as the disconnect between financial and asset markets has widened amid the spread of the COVID-19.

"In a situation in which the level of debt is high and disconnection between financial and asset markets widened, even small impacts may hugely twist the market. We need to monitor for financial vulnerabilities closely and thoroughly," Lee said. Since the outbreak of COVID-19, the BOK has aggressively applied "unconventional policy measures" such as purchases of corporate debt and government bonds in line with an accommodative monetary easing policy.

With some signs of gradual economic recovery, the BOK chief didn't elaborate on the possible triggers which could result in a re-pricing of riskier assets. But some economists were saying the extent and the length of the BOK's support programs for financial markets may turn out to be "too rosy," leading institutional investors to reassess their keen appetite for and pricing of risk once the pandemic fades out.

"The BOK would continue supporting households and companies. But we have to explore the best possible ways on how to boost efficiency in allocating resources," Lee said. The country's leading banks are asked by the financial regulators to closely assess the ability of loan borrowers to repay their loans.

On a related note, Finance Minister Hong Nam-ki said the ministry will apply strengthened measures to prevent any risks that could affect today's ample liquidity in the real economy and equity markets.

"The financial market has shown stability in the wake of the COVID-19 pandemic, but there are growing concerns over the growing gap between the real economy and the financial sector," Hong said. "I sincerely ask financial companies to move forward with their planned management stability programs and to show more support for small- and medium-sized enterprises (SMEs), most of which were severely hit by the continued high level of social distancing measures."

Rising household debt, specifically, has emerged as the top concern for the country's economic policymakers. While Korea successfully managed to escape the worst of the global financial crisis back in 2007, worries are that rising economies with high levels of debt could face steep economic downturns. Korea is looking safe in terms of economic fundamentals mostly because of the financial soundness of the country's leading exporters.





BOK Governor Lee Ju-yeol, left, and Finance Minister Hong Nam-ki
BOK Governor Lee Ju-yeol, left, and Finance Minister Hong Nam-ki

By Kim Yoo-chul

Risk asset prices have rallied due to unprecedented central bank and government measures, with the Bank of Korea (BOK) lowering its benchmark rate to a historically low level.

More precisely, market sentiment has seen a boost through swift and bold actions by the BOK and the country's top financial authorities aimed at addressing heavy market stress in the aftermath of COVID-19. But the BOK chief and Korea's top economic policymaker now warn of a possible disconnect between financial markets and signs of improvement in the real economy.

Their coordinated message follows a consensus that an increasing vulnerability, from the high-level debt standpoint, could pose an actual threat to recovery. In Korea, ample liquidity and growing debt, part of which stem from the government's continuous stimulus policies, may become "unmanageable" for the country's middle class.

In a New Year message to financial companies, Tuesday, BOK chief Lee Ju-yeol said the bank was expecting to see various "looming risk factors" from this year, as the disconnect between financial and asset markets has widened amid the spread of the COVID-19.

"In a situation in which the level of debt is high and disconnection between financial and asset markets widened, even small impacts may hugely twist the market. We need to monitor for financial vulnerabilities closely and thoroughly," Lee said. Since the outbreak of COVID-19, the BOK has aggressively applied "unconventional policy measures" such as purchases of corporate debt and government bonds in line with an accommodative monetary easing policy.

With some signs of gradual economic recovery, the BOK chief didn't elaborate on the possible triggers which could result in a re-pricing of riskier assets. But some economists were saying the extent and the length of the BOK's support programs for financial markets may turn out to be "too rosy," leading institutional investors to reassess their keen appetite for and pricing of risk once the pandemic fades out.

"The BOK would continue supporting households and companies. But we have to explore the best possible ways on how to boost efficiency in allocating resources," Lee said. The country's leading banks are asked by the financial regulators to closely assess the ability of loan borrowers to repay their loans.

On a related note, Finance Minister Hong Nam-ki said the ministry will apply strengthened measures to prevent any risks that could affect today's ample liquidity in the real economy and equity markets.

"The financial market has shown stability in the wake of the COVID-19 pandemic, but there are growing concerns over the growing gap between the real economy and the financial sector," Hong said. "I sincerely ask financial companies to move forward with their planned management stability programs and to show more support for small- and medium-sized enterprises (SMEs), most of which were severely hit by the continued high level of social distancing measures."

Rising household debt, specifically, has emerged as the top concern for the country's economic policymakers. While Korea successfully managed to escape the worst of the global financial crisis back in 2007, worries are that rising economies with high levels of debt could face steep economic downturns. Korea is looking safe in terms of economic fundamentals mostly because of the financial soundness of the country's leading exporters.





Kim Yoo-chul yckim@koreatimes.co.kr


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