South Korea's Real Policy Rate Higher Than US... "Need to Expand Funding Support"

Korea Economic Research Institute Releases Report on 'Recent Corporate Finance Issues and Policy Implications'
Real Interest Rates: US (-3.75%) < Korea (-2.70%)
Corporate Funding Shortage Estimated at Approximately 47 Trillion KRW in Q2

[Provided by Korea Economic Research Institute]

[Asia Economy Reporter Han Yeju] Although the nominal benchmark interest rate is higher in the United States than in Korea, the real benchmark interest rate is higher in Korea than in the United States. Amid the increasing financial burden on companies due to continuous interest rate hikes, there are calls for expanding support for corporate financing, such as adjusting the pace of interest rate hikes, revitalizing the corporate bond market, and easing corporate finance regulations.

The Korea Economic Research Institute stated this in its report titled "Recent Corporate Finance Issues and Policy Implications" on the 7th.

The report pointed out that although the current nominal benchmark interest rate is higher in the United States than in Korea, as of the end of October, the real benchmark interest rate is higher in Korea (-2.7%) than in the United States (-3.75%). Therefore, it is expected that the interest rate felt by domestic companies will be higher than that of U.S. companies, and the impact on the domestic industry is projected to be significant.

Furthermore, considering that there was no domestic capital outflow crisis during past periods of nominal interest rate inversion between Korea and the U.S., the possibility of a sudden capital outflow is not high. On the other hand, raising the benchmark interest rate in line with the pace of U.S. rate hikes is expected to have a serious impact on domestic companies' financing. Therefore, even if a Korea-U.S. interest rate inversion occurs, it is a time when adjusting the pace of interest rate hikes, taking into account the financial resilience of domestic economic agents, is necessary.

The report emphasized that domestic companies need support to resolve their financial conditions in response to interest rate hikes and economic recession. In particular, considering the U.S. benchmark interest rate hikes and high inflation rates, even if interest rate hikes are inevitable, it argued that the pace of interest rate hikes should be adjusted to consider the burden on companies due to rising interest rates.

Additionally, it pointed out that the scale of corporate funding shortages reached about 47 trillion won in the second quarter and is expected to worsen by the end of the year, making the revitalization of the corporate bond market and easing of corporate finance regulations urgent. The corporate bond market is severely constricted due to weakened investment capacity of major institutions, deteriorated investor sentiment caused by rising interest rates, and incidents such as the Legoland case. Although the recent Emergency Macroeconomic and Financial Meeting proposed liquidity supply measures exceeding 50 trillion won, it pointed out the need to further expand support measures such as bond stabilization funds and corporate bond purchases. Along with this, the report stated that financial authorities should consider all possible measures to strengthen support for the real economy through easing corporate finance regulations, such as relaxing the loan-to-deposit ratio regulation and lowering reserve requirements.

Lee Gyuseok, a senior researcher at the Korea Economic Research Institute, said, "Other measures to secure corporate funds could include corporate tax cuts and increasing tax credit rates for research and development and facility investments."

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