[Q&A] Ijuyeol "Strict Fiscal Rules Needed... Corporate Restructuring Must Be Careful"

Bank of Korea Holds Base Interest Rate Steady at 0.50% per Annum

The Governor of the Bank of Korea is attending the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 14th and is striking the gavel.
[Photo by Yonhap News]

[Asia Economy Reporters Eunbyul Kim and Sehee Jang] Lee Ju-yeol, Governor of the Bank of Korea, stated on the 14th, "Strict fiscal rules are necessary to maintain fiscal soundness in the long term."

Governor Lee made this remark during a press conference held immediately after the Monetary Policy Committee meeting at the Bank of Korea headquarters in Jung-gu, Seoul, when asked about his views on the government's announced plan to introduce fiscal rules. He said, "It is significant in that it establishes self-discipline necessary for national fiscal management." He added, "Moreover, Korea is experiencing faster low birth rates and aging than any other country, so mandatory expenditures such as pensions and medical costs are expected to surge, making strict rules necessary."

He continued, "In 2018, the International Monetary Fund (IMF) presented simplicity, enforceability, and flexibility as principles of effective fiscal rules," and said, "Various opinions are emerging from this perspective, and I hope that after in-depth discussions, the National Assembly will come up with the best plan."

Although there are concerns that low interest rates maintained to respond to the COVID-19 pandemic have led to the proliferation of zombie companies, Governor Lee noted that premature restructuring could lead to negative outcomes. He said, "In emergency situations like the COVID-19 crisis, it is extremely difficult to determine which companies are insolvent," and "hasty restructuring can cause side effects by harming even viable companies."

The following is a Q&A session with Governor Lee during the press conference.

- You mentioned maintaining an accommodative monetary stance until signs of economic recovery appear. What do you mean by recovery?

▲ I used this expression to describe a situation where uncertainties related to COVID-19 decrease, and our economy returns to a normal trajectory, continuing stable growth. It is not a situation to judge based on one or two indicators, and because of the base effect from this year's negative growth, we cannot consider switching monetary policy based solely on next year's growth rate. We will make judgments considering the development of COVID-19, trends in real indicators such as consumption, investment, and exports, and comprehensive economic outlooks.

- What is your opinion on concerns that the rapid increase in national debt is lowering the country's credit rating?

▲ I believe that active fiscal management in crisis situations is inevitable. However, concerns about fiscal soundness are worth paying attention to. While active fiscal management is unavoidable, it is important to restore fiscal sustainability to a sustainable level in the long term.

- In the August industrial activity report, facility investment worsened more than expected. How do you view the background?

▲ It is understood that some semiconductor facility investments ended, and imports of transportation equipment such as ships temporarily decreased, leading to the decline. However, monitoring after September shows that imports of capital goods such as machinery and transportation equipment have increased again. Internally, we understand that facility investment actually increased in September.

- It seems that factors other than low interest rates are contributing to the increase in household debt. What are your thoughts on this? How should the increase in household loans under a low interest rate environment be addressed?

▲ In fact, some increase in household debt during the COVID-19 response process is inevitable. However, the recent increase in Korea cannot be overlooked. If household loan funds excessively flow into asset markets, it can act as a factor accumulating additional financial imbalances, so it cannot be taken lightly. Macroprudential measures are being implemented, and I believe it is most important to consistently pursue all related policies. In this process, the Bank of Korea will closely share the situation with policy authorities and suggest various countermeasures if necessary. Typically, in autumn, demand for funds increases due to moving demand, and household loans tend to increase. Recently, banks have shown a somewhat stricter stance on lending, which may have the effect of curbing household loans, so I will observe more and comment later.

- There are concerns that the prolonged low interest rate environment and COVID-19 are increasing the number of zombie companies.

▲ It is true that the continuation of low interest rates in crisis situations has side effects such as an increase in zombie companies. However, I think it is necessary to approach corporate restructuring cautiously in such emergency and crisis situations. During the COVID-19 crisis, it is extremely difficult to determine which companies are viable and which are insolvent. Hasty restructuring can cause side effects by harming even viable companies. Therefore, it can undermine the effects of the COVID-19 response efforts we have worked hard on. If restructuring is pushed hastily, it may be perceived as a signal to withdraw corporate support, so it must be done carefully.

- There are also suggestions to add employment indicators or growth rates to monetary policy goals like in the U.S.

▲ Considering the continued employment weakness since the spread of COVID-19, we somewhat agree with the view that central banks should pay attention to employment increases. However, explicitly adding this to the purpose clause of the Bank of Korea Act requires careful consideration. It may conflict with current goals such as price stability and financial stability, and monetary policy tools are limited to achieving multiple mandates. Operating monetary policy with conflicting goals can make it difficult to maintain policy consistency and may lead to a loss of credibility. It is also problematic to decide which employment statistics to target. Currently, our monetary policy follows a flexible inflation targeting framework. While we set and aim for an inflation target, when conducting monetary policy, we closely monitor not only inflation but also financial stability, economic conditions, and employment situations.

- Is there concern about stagflation, where prices rise despite low real interest rates?

▲ Recently, consumer price inflation rose significantly due to worsening weather conditions causing agricultural product prices to surge, but I expect these temporary factors to ease in the fourth quarter. I do not think it is yet time to talk about stagflation.

- Foreigners are increasing their investment in Chinese government bonds. What impact does this have on foreign investment in Korean government bonds, and what are your views on concerns about supply-demand instability due to rising national debt ratios?

▲ It is difficult to state the impact directly, but I do not think there is a high possibility of a decrease in bond investment in Korea. In fact, when China was included in other international bond indices in the past, global domestic bond investment did not significantly decrease. Currently, I am not greatly concerned about supply-demand imbalances in the bond market. This is because domestic interest rates are relatively high, and major countries' monetary easing policies are expected to continue. If the market becomes unstable, we are prepared to respond actively and promptly.

- Is there a plan to regularize the purchase of government bonds?

▲ There is currently no change to the announced plan to purchase 5 trillion won. We will respond flexibly according to market conditions.

- The exchange rate has fallen due to the global dollar weakness. What is your position on the recent exchange rate situation, and what is the impact on exports?

▲ While the U.S. dollar index has plunged and the Chinese yuan has appreciated, the won-dollar exchange rate has relatively eased and decoupled. The decline in the won-dollar exchange rate since September reflects the perception that the recent resurgence of COVID-19 has subsided domestically and that the won's appreciation had been relatively limited. Global risk factors have not been resolved, and uncertainty remains high, so exchange rate volatility may increase. Appropriate market stabilization measures will be taken if necessary.

▲ The impact of the exchange rate on exports is analyzed to be less significant than in the past. The export structure has become more advanced, and global demand, international trade conditions, and the COVID-19 situation have more influence than the exchange rate. Although the won-dollar exchange rate has fallen, looking at the exchange rates of competing countries, the real effective exchange rate remains unchanged. Therefore, there is no significant negative impact on exports.

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