Unprecedented phase: South Korean Economy
Due to Corona Virus outbreak, South Korean government plans on 8.2 trillion support to provide liquidity to the market
While other parts of the world are praising about how South Koreans been doing good job on containing corona virus, having to enter flattening curve phase, the economy has entered the otherwise, leading the government to make unprecedented decision to support the market, pouring 8.2 trillion.
South Korea economy, Asia’s fourth largest, world 12th (2019, World Bank), near to being developed country, is highly dependent on exports, making it highly susceptible to external factors. As WHO announced pandemic on March 12th, the worries got real, within a month two main stock market, KOSPI, KOSDAC, indicators plummeted and both circuit breaker and side car was operated six times in total.
This was due to foreign investors clearing out the market by selling off one trillion amount of stocks to possess dollars, as it being considered as safe asset during crisis, and companies facing liquidity problem led by main exporting country China, U.S. are having problems of their own. As it seems that the corona pandemic situation does not seem to settle down soon, possibility of going long-term, the government had the pressure to impose stimulus plan to the economy, otherwise many SMEs could go bankrupt and even one of the biggest conglomerates like Samsung or Hyundai could even face liquidity problems, which such impact could set off liquidity problem in the financial market, making the situation even harder to recover or even irreversible.
the declaration of Korean Quantitative Easing
The government officials are well aware of this but there were continuous controversies over how much to draw up the budget and how to implement the budget. Whatsoever the dispute was, after the U.S declaring their QE plan, the President Moon Jae-in announced on 24th that 8.2 trillion aid, nearly one forth of national budget, will be executed to stimulate the economy.
The plan is relates repo where it engages the Bank of Korea buying off unlimited amount of bonds from banks and financial institutions for 3 month-period term, if needed the period could be extended.The government has not mentioned it being QE, however the critics say this measure aligns with QE. As the extensive plan as such is unprecedented, even during 1998 IMF crisis or 2008 global financial crisis this was not considered, the issue had brought up the new controversy.
There are two main matters to regarding the economy stimulus plan:
Korean currency is not key currency.
This is where the biggest matter occurs:
As Korean won not being the key currency, if the government execute QE, Korea could face inflation in huge scale, if worse hyperinflation. One of the reasons why even in the worst periods QE was not an option.
In this plan, to execute unlimited purchase of repo, which only slightly differs from traditional repo, the fundamental does not change, the Bank of Korea basically have to print more money. The public worries that this may lead to situation in Venezuela, which is the recent example of country suffering from inflation, though seems less likely, the matter is the fear.
As Won not being key currency, it’s not the world that’s need of Won, highly likely that it will remain in Korea and will take a while to recollect those money and national debt will surely go up. Meanwhile, the currency rate will go up to some point.
Unsure whether the executed amount will actually flow to sectors in need.
How the plan is stated is that the Bank of Korea buys off bonds from banks and financial institution and they lend money to corporations which had applied for government aid program. If it does work as how its originally planned, the businesses will be able to sustain at least till the pandemic situation is over. However, this is in question, since the measure of such is unprecedented and the aid is only eligible to the companies that has credit guarantee, which tends to be narrow.
The whole plan came out in speed, did not even take a month to plan and declare, also as the general election is coming up on April 15th, the public claims that this grand gesture is perhaps to acquire vote. We do believe that economy experts in the governments and other scholars would have considered all the matters and selected the best eligible option. However, to clam down public worries, they could have elaborated in more details, no matter what this is unprecedented situation and unprecedented measure.
