Government's 3rd Supplementary Budget Includes KDB Capital Injection... Over 20 Trillion KRW Support for Key Industries +a

Decision Made at This Week's Emergency Economic Meeting
Corporate Bond Payment Guarantees Also Considered but Viewed Negatively Due to Fairness Issues

Airline Industry Hopes for Support Measures
Export-Declining Car Industry Also Appeals for Assistance

[Asia Economy Reporters Joo Sang-don, Jang Se-hee, Cho Kang-wook, Yoo Je-hoon] The government is set to unveil a support plan worth '20 trillion won + a' for key industries such as aviation, refining, shipbuilding, machinery, automobiles, and energy, which are struggling due to the impact of the novel coronavirus infection (COVID-19). The government is seriously considering a plan to increase the capital of the Korea Development Bank (KDB) and then purchase corporate bonds.

On the 20th, a senior government official said, "This week, at the Emergency Economic Meeting, a comprehensive plan for companies in industries severely hit by COVID-19, such as aviation, refining, and the automobile industry, will be announced, and the scale could exceed 20 trillion won."

The likely method is for the government to invest capital in KDB, which will then purchase corporate bonds. The government is also considering providing payment guarantees for corporate bonds of key industries, but it is known that there is strong negative sentiment toward this option. A government official said, "There could be fairness issues when determining the targets for payment guarantees," adding, "If payment guarantees are provided for industries A and B, but industries C and D deteriorate later, there could be a problem of having to provide additional payments." This means that fairness issues regarding support by industry could arise. Preparations must also be made in case supported companies become insolvent.

◆KDB capital to be raised through the third supplementary budget= The government has two options to increase KDB's capital: one is through the budget, and the other is by contributing public enterprise stocks or real estate it owns as in-kind contributions. If the government directly invests cash, it must prepare a supplementary budget and obtain the National Assembly's approval. In-kind contributions do not require National Assembly approval but may take considerable time for valuation and assessment.

Currently, the government is seriously considering raising KDB's capital through the third supplementary budget first. There is also talk of possibly using the same method as the 2016 national policy bank capital expansion plan. At that time, the government, together with the Bank of Korea, created a 'National Policy Bank Capital Expansion Fund' totaling 11 trillion won and supported corporate restructuring by contributing 1 trillion won in-kind. However, it is known that the Bank of Korea's participation in capital investment is not currently being considered.

According to the financial sector, KDB has repeatedly requested capital increases from the government. KDB is already required to supply a total of 16.6 trillion won in funds for policy finance support and corporate bond/commercial paper (CP) purchases under the 100 trillion won 'Livelihood and Financial Stability Package Program' announced by the government last month. However, KDB's BIS (Bank for International Settlements) capital adequacy ratio has been declining annually: 15.26% at the end of 2017, 14.80% at the end of 2018, and 14.05% at the end of last year, which is lower than the domestic bank average of 15.25%. Meanwhile, KDB's non-performing loan ratio (loans classified as substandard or below) is 2.67%, the highest among domestic banks. A KDB official said, "Currently, there is capacity to support without short-term liquidity problems, but the burden is increasing," adding, "When the government announced the Livelihood and Financial Stability Package Program, it also expressed the need to consider capital increases in the future."

◆Industry expectations rise= The relevant industries have high expectations for the government's support plan for key industries. Especially for domestic airlines, whose cash inflows have stopped due to 'sky route closures,' government financial support is the last way to avoid a liquidity crisis. Low-cost carriers (LCCs) are struggling with immediate cash shortages. For example, Eastar Jet suspended all routes from the end of March due to worsening business conditions and has also carried out layoffs. Major airlines are facing a dire situation as international flights, which account for 80-90% of passenger revenue, have effectively been 'shut down,' making it difficult to cover huge fixed costs and debts. Korean Air issued 622.8 billion won in asset-backed securities (ABS) last month, but considering the 240 billion won in corporate bonds maturing at the end of this month and monthly fixed costs of 400-500 billion won, it has almost no cash on hand. The company's debts to be repaid or refinanced by the end of the year amount to about 4.03 trillion won.

Accordingly, domestic airlines are seeking escape routes through unpaid or paid leave and asset sales, but they acknowledge the limits of their efforts alone. A representative of a domestic airline said, "LCCs find it difficult to even find collateral when trying to raise funds, and major airlines with many aircraft-related debts are in a situation where cash inflows have stopped, making it difficult to resolve liquidity on their own," adding, "Emergency loans for LCCs and payment guarantees for major airlines are necessary to ease their cash flow."

The automobile industry, which has turned on the emergency light due to export slumps caused by COVID-19, is also appealing for support. The Korea Automobile Manufacturers Association forecasts that the export volume of five domestic automakers this month will be 126,589 units, down 43% compared to the same period last year. The association estimates that the liquidity needed immediately by domestic automakers and parts suppliers exceeds 32.8 trillion won.

The refining industry is also struggling with demand contraction. Due to COVID-19, domestic total petroleum product consumption in February was 72.12 million barrels, the lowest in four years. Meanwhile, crude oil prices recently dropped to around 20 dollars per barrel, recording negative refining margins for four consecutive weeks. Industry insiders predict that the operating losses of the four domestic refiners in the first quarter could approach 2.5 trillion won.

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