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Gov't advised not to be 'overly dependent' on BOK in economic crisis

Bank of Korea Governor Lee Ju-yeol bangs a gavel during a monetary policy board meeting at its headquarters in Seoul, May 28. Yonhap
Bank of Korea Governor Lee Ju-yeol bangs a gavel during a monetary policy board meeting at its headquarters in Seoul, May 28. Yonhap

By Lee Min-hyung

The government is advised not to be "overly dependent" on the Bank of Korea (BOK) for its currency-issuing capacity in time of economic crisis. The focus should be on minimizing post-crisis market confusion.

With the spread of COVID-19 hurting economic activities here and abroad, most central banks around the world have pumped in massive liquidity to help their countries weather economic shocks from the pandemic.

Korea was no exception in that the BOK stood at the forefront of supporting the government's strong pump-priming measures. The BOK supplied liquidity worth 50 trillion won ($41.64 billion) to the market after the pandemic shock started engulfing the local economy in March 2020.

Even if this was an "inevitable step" to salvage the pandemic-hit economy, financial authorities are advised to stop being "too excessively reliant" on the central bank's power to expand market liquidity.

Following the Asian Financial Crisis of the 1990s, the global stock market rally was entirely liquidity-driven and lacking "fundamental strength" of the GDP growth rate and new jobs, coupled with deteriorating profit for companies. In the United States, the post-2008 rally was powered by ample printing of currency by the United States Federal Reserve. But it's still controversial whether or not the Fed and other global central banks have successfully addressed the fundamental problems.

It's quite fair to say global central banks may have postponed problems by printing new money. From that standpoint, the South Korean government, instead, was urged to come up with a more specific roadmap to minimize post-virus shocks, rather than simply expecting the BOK to purchase more deficit-financing bonds to rev up the economy.

The Ministry of Economy and Finance recently repeated its call for the BOK to play a more active role in purchasing the bonds to finance the third anti-virus expansionary budget worth 35.3 trillion won. More than half of the budget will be financed by issuing the bonds worth 23.8 trillion won, according to the ministry.

The ministry is trying to persuade the National Assembly to pass the extra budget plan as early as possible.

The central bank remains careful over whether to accept the request from the ministry, as the potential purchase of deficit-covering bonds is considered a de facto last card the central bank can play to expand market liquidity, after it slashed the benchmark rate to a record low of 0.5 percent in May.

The BOK may be willing to do so if external uncertainties are limited in the latter half of the year, but this is not the case given fears over the possibility of second and third waves of the virus pandemic. Other factors escalating economic uncertainties here include possible restart of a large-scale trade dispute between the United States and China.

The BOK has already taken a series of steps to offer an "unlimited amount" of liquidity to the market. Therefore, concerns are rising over whether the government is ready to normalize worsening fiscal soundness as soon as the virus shock subsides.

Regarding the concern, the finance ministry and other authorities appear not to be fully prepared, as they appear to only be focused on the passage of the budget and are relying more on the central bank's role in their bid to overcome the status quo.

"The shock in the local treasury bond market will be eased if the BOK plays a role in purchasing the increasing amount of bonds," Finance Minister Hong Nam-ki said earlier this month while announcing the third expansionary budget plan.

The ministry, however, has not announced any specific plans over how to brace for the post-pandemic economy and drive down the steep increase in the sovereign debt-to-GDP ratio after executing the third round of the expansionary budget.

The central bank, for its part, also needs to reveal specific action plans to retrieve the expanded liquidity, without which the financial market here is expected to remain volatile. This will end up causing confusion in the local capital market, resulting in outflow of foreign capital for the longer term.

"The worst phase regarding the pandemic shock passed, so it is high time for them to devise plans to minimize the aftermath of the massive anti-virus fiscal spending," a Seoul-based economist said.


Bank of Korea Governor Lee Ju-yeol bangs a gavel during a monetary policy board meeting at its headquarters in Seoul, May 28. Yonhap
Bank of Korea Governor Lee Ju-yeol bangs a gavel during a monetary policy board meeting at its headquarters in Seoul, May 28. Yonhap

By Lee Min-hyung

The government is advised not to be "overly dependent" on the Bank of Korea (BOK) for its currency-issuing capacity in time of economic crisis. The focus should be on minimizing post-crisis market confusion.

With the spread of COVID-19 hurting economic activities here and abroad, most central banks around the world have pumped in massive liquidity to help their countries weather economic shocks from the pandemic.

Korea was no exception in that the BOK stood at the forefront of supporting the government's strong pump-priming measures. The BOK supplied liquidity worth 50 trillion won ($41.64 billion) to the market after the pandemic shock started engulfing the local economy in March 2020.

Even if this was an "inevitable step" to salvage the pandemic-hit economy, financial authorities are advised to stop being "too excessively reliant" on the central bank's power to expand market liquidity.

Following the Asian Financial Crisis of the 1990s, the global stock market rally was entirely liquidity-driven and lacking "fundamental strength" of the GDP growth rate and new jobs, coupled with deteriorating profit for companies. In the United States, the post-2008 rally was powered by ample printing of currency by the United States Federal Reserve. But it's still controversial whether or not the Fed and other global central banks have successfully addressed the fundamental problems.

It's quite fair to say global central banks may have postponed problems by printing new money. From that standpoint, the South Korean government, instead, was urged to come up with a more specific roadmap to minimize post-virus shocks, rather than simply expecting the BOK to purchase more deficit-financing bonds to rev up the economy.

The Ministry of Economy and Finance recently repeated its call for the BOK to play a more active role in purchasing the bonds to finance the third anti-virus expansionary budget worth 35.3 trillion won. More than half of the budget will be financed by issuing the bonds worth 23.8 trillion won, according to the ministry.

The ministry is trying to persuade the National Assembly to pass the extra budget plan as early as possible.

The central bank remains careful over whether to accept the request from the ministry, as the potential purchase of deficit-covering bonds is considered a de facto last card the central bank can play to expand market liquidity, after it slashed the benchmark rate to a record low of 0.5 percent in May.

The BOK may be willing to do so if external uncertainties are limited in the latter half of the year, but this is not the case given fears over the possibility of second and third waves of the virus pandemic. Other factors escalating economic uncertainties here include possible restart of a large-scale trade dispute between the United States and China.

The BOK has already taken a series of steps to offer an "unlimited amount" of liquidity to the market. Therefore, concerns are rising over whether the government is ready to normalize worsening fiscal soundness as soon as the virus shock subsides.

Regarding the concern, the finance ministry and other authorities appear not to be fully prepared, as they appear to only be focused on the passage of the budget and are relying more on the central bank's role in their bid to overcome the status quo.

"The shock in the local treasury bond market will be eased if the BOK plays a role in purchasing the increasing amount of bonds," Finance Minister Hong Nam-ki said earlier this month while announcing the third expansionary budget plan.

The ministry, however, has not announced any specific plans over how to brace for the post-pandemic economy and drive down the steep increase in the sovereign debt-to-GDP ratio after executing the third round of the expansionary budget.

The central bank, for its part, also needs to reveal specific action plans to retrieve the expanded liquidity, without which the financial market here is expected to remain volatile. This will end up causing confusion in the local capital market, resulting in outflow of foreign capital for the longer term.

"The worst phase regarding the pandemic shock passed, so it is high time for them to devise plans to minimize the aftermath of the massive anti-virus fiscal spending," a Seoul-based economist said.


Lee Min-hyung mhlee@koreatimes.co.kr

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