Despite Real-Financial Discrepancies, Money Is Being Released... "The Side Effects Can Only Be Managed Well..."

Response to Novel Coronavirus Infection, Global Liquidity Expansion
Asset Prices Soar but Liquidity Withdrawal Not Possible

Maintain Easing Policy While Monitoring, Manage Side Effects as They Appear
Countries Lack Sharp Measures, Considering Ways to Channel Liquidity into Real Economy

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] As massive funds have been injected worldwide to mitigate the economic impact caused by the novel coronavirus infection (COVID-19), the issue of how to manage the increased liquidity is emerging. It is true that liquidity supply has provided some resilience to financial institutions and the economy, but the real economy has not yet fully recovered, and there are signs that only asset markets are soaring. Since there is a possibility of a resurgence of COVID-19 and many companies and households are still struggling with a lack of funds, it is not possible to withdraw liquidity immediately.

The International Monetary Fund (IMF) warned about the risks arising from the divergence between the real economy and financial markets in its Financial Stability Report (GFSR) released on the 25th (local time). It pointed out that while the global real economy is severely impacted, stock markets continue to rebound, so liquidity risks should be carefully monitored.

The IMF explained, "If investors' risk appetite disappears, the asset values showing divergence could undergo another adjustment," adding, "this could pose risks to economic recovery as well." It also expressed concern that "the difference between market prices and valuations based on fundamentals in most major advanced countries' stock and bond markets is historically high," indicating that market prices are inflated compared to actual values.

Other Gopinath, Chief Economist at the International Monetary Fund (IMF)
[Image source=Yonhap News]

However, the IMF also emphasized that it is not yet time to withdraw liquidity. Gita Gopinath, Chief Economist of the IMF, responded to a question about the risks of increased debt ratios due to liquidity injections at a press briefing held the day before the GFSR release, saying, "Because countries coordinated and supported liquidity, the economic shock was limited to this extent," and added, "Since we have not yet escaped the crisis, fiscal and monetary policies must continue to be deployed in coordination."

She further noted that high debt ratios could particularly impact emerging countries once COVID-19 subsides, so countries need to have long-term plans in place to manage this aspect.

South Korea is showing similar patterns as the global trend. According to the Bank of Korea, the international settlement bank (BIS) capital adequacy ratio of banks at the end of this year, reflecting the policy effects of COVID-19, is 14.8%. This is 0.7 percentage points higher than the 14.1% level without policy responses. The expected net capital ratio (NCR) of securities companies at the end of this year is 516.7% (baseline), more than 200 percentage points higher than 310.1% without policies. This suggests that after the spread of COVID-19, the Bank of Korea actively injected funds, and government policies also worked together, enabling financial institutions to maintain capital adequacy.

[Image source=Yonhap News]

However, increased liquidity in South Korea is also causing side effects by driving up asset prices. On the 25th, Bank of Korea Governor Lee Ju-yeol stated at a briefing on the inflation target operation status that regarding the large-scale liquidity supply in response to the COVID-19 economic shock, "Housing prices, which had shown signs of stabilization, are showing an upward trend again, which is viewed with concern." While the expansion of liquidity supply has been effective in mitigating financial market volatility and preventing contraction of the real economy, rising housing prices are a worrying factor.

However, "given the government's strong policy commitment to stabilizing the real estate market, we will carefully monitor the effects of policies and market movements going forward," he said. He also mentioned, "Considering the recent economic and inflation situation, it is inevitable to operate monetary policy in a accommodative manner."

In summary, although massive funds have been injected worldwide and side effects are emerging, for now, countries have no better option than to 'manage well.'

At the same time, since the world is injecting liquidity under a low-interest-rate environment, it is even riskier for any one country, especially emerging markets, to be the first to withdraw liquidity. Chief Economist Gopinath said, "Although concerns about rising debt are being raised, fortunately, interest rates were already low, so the cost of borrowing was not high," adding, "If liquidity supply is not maintained, the cost could be higher than the risks posed by high debt ratios."

Meanwhile, the South Korean government has proposed the 'Korean New Deal' as a solution to the side effects caused by the surge in liquidity. Kim Yong-beom, First Vice Minister of Strategy and Finance, emphasized at a lecture titled 'Changes in the Economic Paradigm and the Future of Finance in the Post-COVID Era,' hosted by the Institute for Global Economics (IGE) and Hana Bank on the 26th, that "Side effects such as excessive government debt, asset price increases, and liquidity supply to insolvent companies are expected during the COVID-19 response process," and stressed that "these side effects of liquidity surges can be overcome through targeted fiscal spending and productivity enhancement."

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