[Insight & Opinion] Government Policy: Healing COVID Wounds Comes First

The COVID-19 pandemic officially ended after more than three years with the World Health Organization (WHO) lifting its highest level of health alert. However, this is not the end. The global pandemic, which struck humanity for the first time in 102 years, has left tremendous socio-economic scars. The shock leaves wounds, and the scarring effect from those wounds hinders economic growth and causes societal suffering. Therefore, at the starting point of the 'post-COVID era,' the most important task is how to heal the wounds left by COVID and secure resilience.

The economic sentiment index announced by the Bank of Korea stood at 90.1 in April, the lowest since May 2009 except for the COVID period in 2020. In other words, the Korean economy is currently experiencing the economic aftereffects of the COVID pandemic. Over the three years of COVID, the nation's total debt increased by 1,139 trillion won. Government finances (based on D1) rose by 334 trillion won, household credit (Bank of Korea) by 266 trillion won, and private companies by 538 trillion won. In particular, debt among self-employed individuals increased by 355 trillion won, with multiple debtors?who account for 70% of self-employed debt?estimated to have increased their debt by 240 trillion won. By the end of 2022, loans to the self-employed reached 1,029 trillion won, surpassing mortgage loans at 1,012 trillion won. Therefore, the issue of self-employed loans has emerged as the biggest challenge threatening the soundness of South Korea’s financial system.

The accumulation of debt is followed by an increased burden of principal and interest repayments. If the increased repayment burden cannot be managed, delinquencies occur, and as delinquency rates rise, financial institutions strengthen asset soundness management and restrict additional lending. As a result, it becomes even more difficult for self-employed individuals to obtain loans to sustain their livelihoods. Various indicators already signal that self-employed individuals are approaching the brink of collapse. The number of debt adjustment applications submitted to the Credit Recovery Committee in the first quarter of this year exceeded 46,000, a 44% increase compared to the same period last year, marking the highest in 17 years. Personal bankruptcy filings at the Seoul Rehabilitation Court rose by 48% year-on-year to 30,182 cases in the first quarter of this year. In short, the wounds from COVID are festering and bursting.

The government plans to end the maturity extension and repayment deferral measures, which have been extended five times since April 2020, in September 2023 and is encouraging applications for the 'New Start Fund' as a debt soft-landing measure. However, the government overlooks the reason for the low response from debtors to the 'New Start Fund.' The core of the maturity extension and repayment deferral measures is to guarantee conditions that allow self-employed individuals to continue their livelihoods without being pressured by loan repayments. However, the 'New Start Fund' does not guarantee financial conditions that enable the self-employed to sustain their businesses. Therefore, the 'New Start Fund' cannot replace the maturity extension measures. As a result, after September, self-employed individuals will face much more difficult conditions to sustain their livelihoods due to deteriorated financial circumstances. This implies a massive risk of non-performing loans on self-employed loans for financial institutions. Although the COVID pandemic has ended, and the livelihood conditions of the self-employed have not improved, the government is pushing self-employed individuals off a cliff into normal financial conditions.

It is still too early for normalization. The government must prioritize policies to heal the wounds of COVID rather than normalizing finance. The problem of worsening livelihood conditions for the self-employed caused by support suspension is a far more serious issue than the moral hazard problem arising from maturity extensions. If the government's policy goal is a 'soft landing,' maintaining financial conditions that allow the self-employed to focus on their livelihoods is the best soft-landing measure. In this regard, a comprehensive review of government policy is required.

Kim Dong-won, Former Visiting Professor at Korea University

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