[COVID-19 Great Transformation] "Economic Crisis as Severe as Financial Crisis... Government Must Inject More Money"

Already Released 161 Trillion Won of Government Funds Including Supplementary Budget
"Direct Purchase of CP and Corporate Bonds Needed" 50%
"Additional Base Rate Cut" Also 26% Respond...Possibility of Quantitative Easing

Massive Ripple Effects if Large Corporations Collapse
Calls for Targeted Support

[Asia Economy Reporters Eunbyul Kim and Sehee Jang] Economic, financial, and industrial experts unanimously agree that the government and the central bank need to take more proactive measures to minimize the economic impact caused by the novel coronavirus infection (COVID-19). Although more than 161 trillion won has already been supplied to the market since confirmed COVID-19 cases emerged, experts believe this is still insufficient. They emphasized that the economic damage is greater than during the 2008 financial crisis, and since COVID-19 has become a pandemic, further damage is expected for the foreseeable future, making additional support necessary.

According to a "Post COVID-19 Emergency Diagnosis" survey conducted on 112 experts by Asia Economy Newspaper on the 28th, 54.47% (61 respondents) answered that "(government fiscal policy) is still insufficient and more fiscal resources must be mobilized." This reflects the view that more active support is needed given that the economic damage caused by COVID-19 is more severe than the global financial crisis. Those who responded that the fiscal policies announced so far by the government are at an "appropriate level" accounted for 28.57% (32 respondents). Only 10.71% (12 respondents) said that excessive responses would only increase the fiscal burden going forward.

As of the 27th, the amount of money released by the government and the Bank of Korea in response to COVID-19 has already exceeded 161 trillion won. The government allocated 11.7 trillion won and 9.7 trillion won in the first and second supplementary budgets, respectively. Additionally, 4.6 trillion won is planned to be injected through emergency disaster relief payments to all citizens. Beyond this, 135.1 trillion won is set to be provided in financial support, including corporate funding supply, stabilization support for corporate bonds and short-term money markets, and expansion of demand bases in the stock market. The Bank of Korea supplies about half of this liquidity and has also sharply lowered the base interest rate to 0.75%.

However, experts have also called for additional measures from the Bank of Korea. According to the survey, half of the respondents (50.0%, 56 people) said, "The Bank of Korea should also introduce direct purchase measures for commercial paper (CP) and corporate bonds." This is interpreted as a need for Korea to adopt a system similar to those of central banks in the U.S., Europe, and other countries, which have introduced measures to purchase distressed corporate bonds and CP due to COVID-19. Currently, the government, the Bank of Korea, and KDB Industrial Bank are reviewing plans to purchase corporate bonds and CP through a special purpose vehicle (SPV). Additionally, 25.89% (29 respondents) said the base interest rate should be lowered further. Therefore, attention is focused on what decisions the newly formed Monetary Policy Committee of the Bank of Korea will make at next month's meeting. However, since lowering the base rate once more would reach the effective lower bound (estimated by the market to be around 0.5%), it is uncertain what further policies the Bank of Korea can implement. There is speculation that after lowering the rate to the effective lower bound, the Bank of Korea might begin traditional quantitative easing (directly purchasing long-term bonds to induce a decline in long-term interest rates).

The emphasis by experts on proactive roles for the government and the Bank of Korea appears to stem from the perception that the current situation is an "unprecedented" crisis. Regarding the economic impact of COVID-19 on the global economy, more than half of the respondents, 51.79% (58 people), said it is at the level of the 2008 financial crisis. Those who answered it is at the level of the 1929 Great Depression accounted for 23.21% (26 people). Opinions that it would be at the level of the 1998 foreign exchange crisis were 4.46% (5 people). Some other responses indicated that the severity is greater than the financial crisis but not at the level of the Great Depression.

However, respondents emphasized that the additional funds released must be injected appropriately and effectively. They pointed out the need for "targeted support" aimed at revitalizing the economy. There is a particular call for targeted support to focus on corporate assistance. Professor Shinyul from Myongji University’s Department of Political Science and Diplomacy said, "If large corporations collapse, the resulting economic ripple effects are enormous," adding, "Additional fiscal and tax support is needed for industries such as aviation and refining." This concern arises from the fear that corporate collapse could lead to a vicious cycle of reduced investment → employment contraction → decreased household income → economic recession. Regarding the government's planned New Deal projects, he stated, "The New Deal is a policy used when consumption is depressed," and "When both consumption and production collapse as now, saving companies should be the priority."

However, since it is difficult to predict how long the COVID-19 crisis will last, some opinions suggest that a buffer should be maintained to prepare for the possibility of recurring shocks. Lee Kyungsoo, head of the Meritz Securities Research Center, criticized the government’s heavy reliance on deficit bond issuance for funding. He said, "The government claims that the national debt ratio relative to GDP is lower than other countries and thus introduces various policies, but since Korea is not a key currency country, it is difficult to compare absolute ratios." He added, "In other countries, the central bank can buy deficit bonds to avoid default, but as a peripheral currency country, Korea’s Bank of Korea cannot purchase deficit bonds."

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