FSC stands at the ready to provide liquidity to companies

Economy

Published: 07 Sep. 2022, 18:29 Updated: 07 Sep. 2022, 20:05

FSC stands at the ready to provide liquidity to companies

Financial Services Commission Chairman Kim Joo-hyun presents the new administration’s financial policies as keynote speaker at the Korea JoongAng Daily’s annual economic forum held at the Westin Josun Hotel in Seoul on Wednesday. [PARK SANG-MOON]

Financial Services Commission (FSC) Chairman Kim Joo-hyun said the current policy direction for dealing with market volatility includes providing financial support to households and companies struggling with temporary cash crunches.

He also noted the better measuring of "liquidity" and "capital adequacy" of financial companies through meticulous stress tests.

"It's been 100 days since the new administration started, and currently, the biggest concern is the higher debt in the private sector, both for households and businesses," Kim said during the annual Korea JoongAng Daily Korea Economic Forum held at Westin Josun Hotel in Seoul, Wednesday. "Huge amounts of liquidity have been supplied since the global crisis in 2008 and also during Covid-19. This means an increase in debt."

Kim spoke on the Yoon Suk-yeol administration's financial policy agenda amid the global crisis as the keynote speaker.

The FSC chairman said when such debt expands rapidly, the usual approach is a soft landing through gradual liquidity reduction.

"However, due to Covid-19 as well as dynamic international politics, the global supply chain has collapsed, the unexpected war between Russia and Ukraine has led to inflation, which gave countries led by the United States no choice but to raise interest rates," Kim said. "Currencies weakened against the dollar and asset values have fallen sharply, including stocks, real estate and crypto assets."

"As such, there are already concerns of a recession and even stagflation."

The FSC chairman said small business especially have been facing great difficulties over the past two years.

"This is not a problem that was caused by their own mismanagement," Kim said. "Our society itself won't be able to unite without taking care of these people who have been in an unusual situation since Covid-19 started."

The top financial policymaker emphasized that the insolvency of these small businesses will spill over into the financial industry.

"We need to help these businesses pull through," Kim said.

He said while there is a limit to what the government can do to control the market volatility, there are tools in which temporary liquidity could be provided to households and companies in need when the situation becomes severe.

The FSC earlier laid out measures to contain household and company outlays as rates are raised to combat inflation. These include debt adjustments, refinancing of loans at lower rates and converting floating-rate loans to fixed-rate.

From left to right, Park Sung-ho, CEO of Hana Bank, Lee Seong-kweun, vice mayor for economic affairs Busan Metropolitan City, Yoon Jong-kyoo, chairman and CEO of KB Financial Group, Kim Joo-hyun, chairman of the Financial Services Commission, Cheong Chul-gun, CEO of the Korea JoongAng Daily, Son Tae-seung, chairman and CEO of Woori Financial Group and Yoo Kwang-yeol, president and CEO of Seoul Guarantee Insurance. [PARK SANG-MOON]

The Bank of Korea has raised interest rates seven times since August last year taking it from a record low of 0.5 percent to 2.5 percent. Additional rate hikes are expected, with policy rate raising to 3 percent by the end of the year.

During the forum, the FSC chairman said that the key to riding out market volatility is the consistency of fiscal, monetary and foreign exchange policies.

Kim said as such the Yoon administration's fiscal, financial and monetary authorities are working closely and that they will act swiftly and aggressively against risks to financial institutions and companies.

The FSC chairman also presented the government's long-term economic goals for the country, which is facing a crisis of a shrinking population that has weakened the country's potential growth.

"The key words for the basic policy direction are regulatory reform, practical regulation, easing of regulation and a market-driven private-sector centered on the economy," Kim said. "Yet at the same time protecting those who are vulnerable."

The policies are designed to address lowering productivity due to the low fertility rate and the aging population.

"Efficient utilization of capital and labor — which is productivity — are equally falling due to the slowing down of capital accumulation and the suspended advancement of industrial structures due to business environment uncertainties."

He said due to the shrinking working age population, Korea's growth potential is falling.

Kim said Korea on its own is fundamentally stronger than in the past. It is No. 8 in terms of foreign currency reserves, and the credit default swap premium is only up 30 basis points, a stark contrast to 2008, when it surged 700 basis points.

"Our credit score remains at the best," Kim said. "While we have been reporting a trade deficit because of the sharp surge in energy imports, we expect the account balance, which is a comprehensive indicator of our external soundness, to be in surplus this year."

Korea's financial companies, which are the "first line of defense" against instability, are "maintaining solid soundness" in part due to better oversight since the 2008 global crisis, he continued.

"Their ability to absorb losses has improved significantly, while their BIS capital adequacy ratios are far above the regulatory level," Kim said.

He said the financial authority will continue to supervise financial companies on liquidity and capital adequacy.

"We are a very open globalized economy like Korea, so we are just as vulnerable to those exchange rate shifts and shifts in the prices, particularly on energy," said Michelle Winthrop, the Irish ambassador to Korea. "It's great to hear some of the thinking of the new administration about how to deal with them. I was also struck by the long-term issues that the FSC chair raised in his speech — the demographic changes — because they will play into the country's productivity."

KB Financial Group Chairman Yoon Jong-kyoo said the FSC chairman clearly and concisely described the country's policy direction.

"The biggest concern in times of the economic crisis and stagflation is whether it spreads to a financial crisis," Yoon said. "I believe banks have sufficiently built up a buffer by strictly and soundly managing the assets.

"I'd like to tell the ambassadors that Korea is well prepared when it comes to financial stability."

"As FSC Chairman Kim has said, the current economic crisis is not isolated to Korea," said Yoo Kwang-yeol, Seoul Guarantee Insurance CEO. "But compared to other countries, Korea is doing well in terms of risk management."

He added that deregulation is particularly important for Korean businesses in gaining the trust of foreign investors.

The forum "clarified what downside risks there are for Korea as the world faces the situation after Covid," said Federico Alberto Cuello Camilo, Dominican Republic ambassador. "The policies that the government is implementing is on the right track, and they are preparing for the future.

"Transition to digitalization clearly has to be done in a way that protects consumer interests, and the approach to crypto currencies is very prudent. How Korean policymakers are approaching cryptocurrency is quite instructive for us."

Seoul-based diplomats from more than 30 countries including Australia, Ireland, Finland and Egypt attends the Korea Economic Forum held at the Westin Josun Hotel in Seoul on Wednesday. [PARK SANG-MOON]

Finnish Ambassador to Korea Pekka Metso asks a question at the Korea Economic Forum at the Westin Josun Seoul on Wednesday. [PARK SANG-MOON]

From left, Thai Ambassador Witchu Vejjajiva, Vietnamese Ambassador Nguyen Vu Tung, Philippines Ambassador Maria Theresa Dizon-De Vega and Cambodian Ambassador Chring Botumrangsay hold a discussion at the forum. [PARK SANG-MOON]

Adeline Lise-Khov, head of the economic department of the French Embassy in Seoul, asks a question during the forum. [PARK SANG-MOON]

From left, Dominican Ambassador Federico Alberto Cuello Camilo, Irish Ambassador Michelle Winthrop and German Deputy Head of Mission Peter Winkler engage in a discussion at the forum. [PARK SANG-MOON]

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]