Total Available Budget 30 Trillion+α... Can the Government and Bank of Korea Prevent the Second Wave?

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[Asia Economy Reporters Kwangho Lee and Eunbyul Kim] Amid massive human and material damage caused by heavy rains, concerns about a second wave of COVID-19 have increased calls for the formulation of a 4th supplementary budget. Although the government maintains that it has sufficient fiscal capacity for flood recovery, the scale of damage is rapidly expanding like a snowball, and there is a high possibility of a surge in fiscal demand due to concerns over a COVID-19 resurgence.

According to the Ministry of Economy and Finance on the 22nd, the budget currently available for mobilization by the government amounts to about "3 trillion won + α," including disaster countermeasure budgets already secured this year, contingency funds, outstanding construction costs, and the northern district budget to be supported next year. Specifically, this includes approximately 400 billion won remaining in the existing budget for disaster countermeasures, about 1.5 trillion won from the 2.6 trillion won general and purpose contingency funds after excluding other future contingency fund needs, the full 1.3 trillion won limit for disaster-related national treasury bond obligations under the budget general rules, and 200 billion won + α allocated for heavy rain support in next year’s budget proposal.

However, the exact amount of damage has not yet been calculated. It is premature to assert that the government’s fiscal capacity is sufficient as it is difficult to estimate how much national treasury support will be required. Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki also expressed concern, stating, "We do not know whether the national treasury demand will be 2 trillion won, 2.5 trillion won, or 3 trillion won."

The problem is that while there may be enough funds for flood recovery, the budget will be severely insufficient in the event of a second major COVID-19 outbreak. To prevent a large-scale outbreak, quarantine measures and economic revitalization policies must be implemented, which require fiscal support. Additionally, with unemployment benefit payments reaching record highs, the employment insurance fund is rapidly depleting.

The Bank of Korea (BOK) also has limited options left. In March and April, the BOK took unprecedented measures. As the domestic real economy was hit early in the COVID-19 spread, it increased the limit on financial intermediary support loans and cut the base interest rate from 1.25% to 0.50%, a 0.75 percentage point drop. As financial markets, led by the U.S., became volatile, the BOK introduced measures to stabilize the market, including unlimited liquidity supply through repurchase agreements (RP) for financial institutions, new loan systems for securities and insurance companies, and the establishment of a special purpose vehicle (SPV) to purchase corporate bonds and commercial paper (CP).

If the second COVID-19 shock worsens, a representative option the BOK could consider is an additional base interest rate cut. Since major countries like the U.S. are maintaining near-zero interest rates, many expect the BOK to lower its base rate at least once more. If the U.S. Federal Reserve declares it will keep low rates until inflation rises or introduces yield curve control (YCC) policies, the BOK might issue similar signals to influence the market.

Other than that, actively utilizing already established programs is the best course of action. Temporarily suspended unlimited liquidity supply through RP purchases, foreign currency loans using the Korea-U.S. currency swap funds, and loans to non-bank financial sectors are possible.

The BOK is also expected to actively participate in purchasing government bonds increased by the government’s large supplementary budget. A BOK official stated, "Traditionally, central bank independence is important, but recently, there has been a global trend of policy mix cooperation, and this trend will strengthen the longer the crisis lasts."

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