[Weekly Review] Korea's Version of Quantitative Easing 'Unlimited RP Purchases'... Will It Ease Market Anxiety?

Temporary Application of Foreign Currency LCR from 80% to 70% and Exemption of Foreign Exchange Soundness Burden Charges for Financial Companies
Government "Prevent Corporate Bankruptcy"... 100 Trillion Won Injected into 'Corporate Emergency Relief Fund'

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] As the Bank of Korea has decided to supply unlimited liquidity (funds) to financial companies for the time being, attention is focused on whether the liquidity instability in the financial market will be resolved. In addition, financial authorities have temporarily lowered the foreign currency Liquidity Coverage Ratio (LCR) regulation from 80% to 70% and decided to exempt financial companies from the foreign exchange soundness surcharge. The government also plans to inject an emergency corporate relief fund worth 100 trillion won as a measure to support companies.

◆ Bank of Korea to supply unlimited liquidity to financial companies for three months = On the 26th, the Bank of Korea held a Monetary Policy Committee meeting and announced that from April to June, it will introduce a repurchase agreement (RP) purchase system that supplies the entire market liquidity demand without restriction below a certain interest rate level. An RP is a bond that a financial institution sells with the condition of repurchasing it after a certain period, with a predetermined interest added according to the elapsed period. When the Bank of Korea purchases RPs through open market operations, liquidity supply in the market becomes smoother. Until the end of June, it will regularly purchase 91-day maturity RPs every Tuesday at a certain interest rate level. The method is to allocate the entire amount without limit. The first auction will be held on May 2.

◆ Temporary application of foreign currency LCR from 80% to 70% and exemption of foreign exchange soundness surcharge for financial companies = The government has decided to temporarily ease the regulations introduced to maintain banks' foreign exchange soundness. The foreign currency Liquidity Coverage Ratio (LCR) will be lowered from the existing 80% to 70%. Also, to reduce overseas borrowing costs for financial companies, the foreign exchange soundness surcharge will be exempted for the next three months. The Ministry of Economy and Finance, Financial Services Commission, Bank of Korea, and Financial Supervisory Service held a macroeconomic and financial meeting on the 26th and made this decision. As the spread of the novel coronavirus disease (COVID-19) has continued to cause instability in the international financial market and intensified the preference for dollars, the government intends to facilitate domestic foreign currency liquidity supply. Previously, the government raised the bank forward foreign exchange position limit, a regulation that restricts the scale of foreign currency liabilities in the form of forward contracts, by 25% and has been implementing it since the 19th.

◆ Moon administration to inject 100 trillion won in 'Corporate Relief Emergency Fund' = The government will provide financial support worth 100 trillion won to companies facing crisis due to the COVID-19 outbreak. On the 24th, President Moon Jae-in held the 2nd Emergency Economic Measures Meeting at the Blue House and announced the decision to inject a 100 trillion won corporate relief emergency fund. The government also plans to establish a Corporate Bond Market Stabilization Fund worth 20 trillion won to help sound companies overcome temporary liquidity shortages caused by financial market instability. The size of the stabilization fund is twice the initially prepared 10 trillion won. For companies experiencing temporary liquidity crises due to COVID-19, a separate fund of 17.8 trillion won will be supplied. Additionally, a Securities Market Stabilization Fund will be established with a size of 10.7 trillion won.

◆ Despite COVID-19 impact, exports increased by 10% from the 1st to the 20th of this month = Despite the impact of COVID-19, South Korea's export value from the 1st to the 20th of this month increased by 10% compared to the same period last year. However, due to increased external uncertainties, it remains unclear whether the total export value for March will record a positive figure. According to the Korea Customs Service on the 23rd, the export value from March 1 to 20 (provisional customs clearance basis) was 30.7 billion dollars, an increase of 10.0% (2.78 billion dollars) compared to the same period last year. Despite concerns about global economic slowdown and weak demand due to the COVID-19 crisis, exports recorded a positive figure. However, the number of working days during this period was 16, which is 1.5 days more than last year. The increase in working days significantly influenced the recovery of export indicators. Considering the number of working days, the average daily export value was 1.92 billion dollars, a decrease of 0.4% (about 10 million dollars) compared to the same period last year. This seems to reflect the impact of COVID-19 to some extent. However, whether the total exports for March will be positive remains uncertain. An official from the Ministry of Trade, Industry and Energy said, "The COVID-19 situation is very uncertain, so we need to observe more."

This content was produced with the assistance of AI translation services.