Woo Tae-hee "Government COVID Policy Has 'Gray Areas'... Needs More On-Site Sensitivity"

[Economic Crisis, Escape Route ⑥] Woo Tae-hee, Executive Vice President of the Korea Chamber of Commerce and Industry (Former 2nd Vice Minister of Trade, Industry and Energy)
"Government's swift policies receive positive market response, but lack practical impact on businesses"
"Active and field-oriented measures needed for affected industries and key sectors"

Woo Tae-hee, Executive Vice Chairman of the Korea Chamber of Commerce and Industry

The novel coronavirus infection (COVID-19) is rapidly spreading to the United States, Europe, and other regions. As of the 1st, the total number of confirmed cases worldwide exceeds 910,000. COVID-19 patients are still surging in the United States and the European Union (EU), and it is expected that the number will soon surpass one million. The world is busy responding to a new type of crisis never experienced before. It is a crisis in both health and economy, and the countermeasures for each are in a trade-off relationship, making it even more difficult.

Currently, countries are making every effort to prevent the real economy crisis from turning into a financial crisis. The United States has lowered its benchmark interest rate to zero and implemented unlimited quantitative easing, while Europe announced an emergency bond purchase program worth 750 billion euros. South Korea has also introduced all possible measures, including lowering the benchmark interest rate (from 1.25% to 0.75%), corporate funding support through policy finance (58.3 trillion won), financial market stabilization support (31.1 trillion won), and a securities market stabilization fund (10.7 trillion won).

Despite the efforts of countries to support their economies, it seems challenging to contain the spread of the crisis. Major economic forecasting institutions are revising their economic growth forecasts downward. The Organisation for Economic Co-operation and Development (OECD) lowered its global growth forecast for this year from 2.9% to 2.4%, and Moody’s reduced it from 2.9% to 2.1%. The gloomy outlook for the global economy is due not only to the economic downturn caused by the spread of COVID-19 but also concerns about the unstable economic foundations of the United States and the EU.

First, in the United States, there are concerns that collateralized loan obligations (CLOs), a type of derivative financial product, could become a trigger for a financial crisis. CLOs are high-risk, high-return products issued by bundling bank loan claims to companies with low credit ratings as collateral. As of 2018, the size of CLOs in the United States alone approaches $130 billion (about 160 trillion won). Although the risk is not as great as asset-backed securities (CDOs) in the past, if the liquidity crisis of U.S. shale gas companies, triggered by the sharp drop in international oil prices, combines with this, the risk to CLO-invested companies could increase. Seeing a similar problem repeating despite the 2008 financial crisis caused by CDOs recalls Thucydides’ insight that “history repeats itself because of human nature.”

In the EU, the fiscal capacity of the so-called 'PIGS' countries?Portugal, Italy, Greece, and Spain?could be problematic. COVID-19 is rapidly spreading mainly in southern Europe, where the PIGS countries are located, affecting the entire European economy. After the global financial crisis, the PIGS countries significantly increased fiscal spending to revive their economies. If the expansion of fiscal spending to respond to COVID-19 leads to default, it means that all EU countries tied to the single currency, the euro, will bear the risk burden.

The contraction of the global economy raises concerns about the impact on our export-driven economy. According to the industrial activity trends announced by Statistics Korea for February, industrial production recorded a -3.5% decline compared to January, marking the largest drop in nine years, and automobile production decreased by 28%. The aviation and shipping industries, which are key sectors, have also been hit hard by COVID-19. International passenger flights have been reduced by 80%, maritime passenger transport has been suspended, and cargo transport has also seen a reduction in the number of operations. The tourism industry’s sales are virtually zero due to worldwide entry bans. Accommodation, directly linked to the livelihood of ordinary people, decreased by 33%, and restaurants by 16%. With sales plummeting in vulnerable industries, there is concern whether our economy can withstand the tsunami of a global recession.

The government has announced two rounds of measures to support industries heavily affected, such as aviation, shipping, and tourism. Especially since aviation and shipping are key industries, if the infrastructure base of these industries collapses, it would have a fatal impact on the economy and cause us to miss opportunities that arise after the crisis. The government’s prompt announcement of various support measures is appropriate, and the market’s response to the scale of funding supply is positive. However, according to feedback from the business field, the practical effectiveness does not seem high yet. This perception among companies means that although the government has introduced support measures, funds are not reaching the places where they are most needed, indicating the existence of a policy grey zone. More proactive and field-oriented measures should be introduced for the affected industries and key sectors.

The COVID-19 situation started with difficulties in companies trading with China, spreading to liquidity crises in vulnerable domestic industries, and is gradually expanding to issues involving global trading conglomerates. The initial difficulties with companies trading with China appear to be in the fire-extinguishing stage, the liquidity crisis in vulnerable domestic industries is ongoing, and issues with global trading conglomerates are slowly approaching. To block this, the Ministry of Trade, Industry and Energy’s preemptive response by presenting the 'Guidelines for Exceptional Entry Permission for Businesspeople' to countries through the G20 Special Trade Ministers’ Meeting is appropriate.

Jason Furman, a Harvard professor who served as chairman of the Council of Economic Advisers under the Barack Obama administration that managed the global financial crisis, presented a standard for overcoming COVID-19: the first is that “overreaction (too much) is better than underreaction (too little).” The crisis in the industries currently heavily affected must be actively and quickly resolved to accumulate the strength to respond to the coming big storm. We have assets from overcoming the foreign exchange crisis. During the global financial crisis, some industries took the opportunity to secure global competitiveness. Learning from such experiences in overcoming crises, it is expected that we will successfully overcome the current COVID-19 situation.

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