Financial Research Institute: "Caution Needed in Ending COVID-19 Loan and Interest Repayment Deferrals"

Researcher Kim Young-do, Presentation on COVID-19 Policy Response

Park Jong-gyu, President of the Korea Institute of Finance, is delivering the opening remarks at the Financial Policy Evaluation Symposium on COVID-19 Response held on the 6th at the Bankers' Hall in Jung-gu, Seoul. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Kim Jin-ho] A recommendation has been made that caution is needed when ending temporary financial support programs such as dividend restrictions and loan and interest repayment deferrals to prevent aftereffects of the COVID-19 crisis. Given concerns over rapid normalization such as taper tantrums, it is pointed out that appropriate policy responses should be taken at each stage.

Senior Research Fellow Kim Young-do of the Korea Institute of Finance stated this on the 6th at the 'Evaluation of Financial Policies in Response to COVID-19' symposium held at the Bankers' Hall in Jung-gu, Seoul, through a presentation titled 'Post-COVID-19 Economic and Financial Conditions and Major Countries' Policy Responses.'

Research Fellow Kim diagnosed, "The shock to the real economy caused by COVID-19 was significantly larger than expected," adding, "At the beginning of last year, the global economic growth forecast was 3.3%, but in reality, it showed economic growth of -3.3%, which is 6.6 percentage points lower."

However, he judged that thanks to bold policies mainly by major advanced countries during the COVID-19 crisis response phase, financial markets quickly stabilized and the global economy is also rebounding. In particular, he saw that aggressive monetary, fiscal, and financial policies such as rapid interest rate cuts by central banks, liquidity supply, principal and interest repayment deferrals, and temporary easing of financial regulations had a great effect.

In fact, JP Morgan’s global Purchasing Managers’ Index (PMI), a leading indicator of major practical economies, stood at 68.1 as of May, exceeding pre-COVID-19 levels. The OECD’s Composite Leading Indicator also showed a rapid recovery, reaching 100.5 as of May.

However, Research Fellow Kim warned that concerns about uneven recovery should be guarded against. According to the World Bank, 94% of advanced countries are expected to recover to pre-COVID-19 levels within two years, but the rate for emerging and developing countries is projected to be only 40%.

Accordingly, he suggested that South Korea should take appropriate policy responses according to the normalization phase to prevent aftereffects of the crisis. Research Fellow Kim said, “Decisions on extending or ending measures such as dividend restrictions and the extension of corporate bond purchase facilities are under review, but these should be decided cautiously based on the financial market situation and performance evaluations of various support programs.”

He also said that policy responses should consider changes in the international financial environment. He stated, "Due to the pandemic’s aftermath, financial vulnerabilities are expanding, such as a sharp increase in the private debt-to-GDP ratio in some emerging countries including Korea," adding, "Measures for a soft landing regarding the domestic vulnerable situation, such as monitoring the foreign exchange market in preparation for overseas interest rate hikes and household debt issues, should also be prepared together."

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