Monetary and fiscal policymakers here have been out of step on how to finance restructuring debt-laden companies that are weighing on Korea’s economy.
It may not be unusual for them to hold different views. But their prolonged discord risks derailing the urgent task of corporate restructuring.
BOK Governor Lee Ju-yeol. Yonhap
Moreover, central bankers and government policymakers have recently sent inconsistent signals, partly influenced by the changing political climate.
BOK officials have changed words on what is called the Korean version of quantitative easing, which was proposed by the ruling Saenuri Party in the general election last month.
The proposal calls for the central bank to print money to buy bonds and securities from policy lenders to help overhaul debt-ridden firms and curb mounting household debt. Of late days, government policymakers have made a more limited and specific demand that the BOK pump money into Korea Development Bank and Export-Import Bank of Korea to help their work to restructure shipping and shipbuilding companies reeling under piles of debt.
The BOK on Saturday tried to tone down earlier remarks by a senior bank official, which had been viewed as an outright rejection of President Park Geun-hye’s wish to see the central bank play a role.
“For the central bank to exercise its money-issuing power to do what should be addressed by a fiscal policy, social consensus is a prerequisite,” said Yoon Myun-shik, assistant governor, during Friday’s press briefing, a day after Park called for the positive consideration of a selective quantitative easing to carry out corporate restructuring.
Economic commentators viewed the remark as showing the BOK had been emboldened by the election win by opposition parties which have opposed any type of quantitative easing. In the days before the poll, the central bank remained shy of making an explicit statement negative to the policy pledge by the ruling party.
In a reluctant change of stance, BOK officials have recently suggested they are ready to lend money to the government in the form of purchasing state bonds. But this method -- which, like a supplementary budget, requires parliamentary approval -- may take too long to carry out the urgent restructuring work, government policymakers argue.
Finance Minister Yoo Il-ho said on the election day in April that an extra budget was conceivable. But he last week ruled out the possibility of drawing up a supplementary budget to recapitalize policy banks. The minister said tapping into taxpayers’ money for corporate restructuring should be the last resort.
Jung Dae-hee, a researcher at the Korea Development Institute, a state-run think tank, noted economic policymakers tend to prefer money printing to fiscal support that holds them responsible for their decisions.
“In case the money-printing measure is to be taken, it is necessary to prevent possible moral hazard among its benefactors and policymakers alike,” he said.
Critics of quantitative easing argue that Korea’s economy is not yet in such a crisis that needs the central bank to print money, increasing the burden and concern for people.
But calls are mounting that the BOK should assume a more positive role.
Economists note time is running out for restructuring local shipping and shipbuilding companies saddled with combined debts of 78 trillion won ($68.1 billion). The collapse of the industries would result in shedding tens of thousands of jobs.
Nearly 14 out of 100 Korean companies have failed to make interest payments with operating profits for the past three consecutive years. Household debt jumped by 11.2 percent from a year earlier to 1.207 quadrillion won at the end of last year.
BOK officials have said quantitative easing should be considered when interest rates are to be further cut near to zero percent. But facilities investment has barely increased in recent months with the key interest rate remaining at a record low of 1.5 percent since last June. Any further rate cut may prompt capital outflow with the U.S. Federal Reserve still open to the possibility of making additional rate hikes in the second half of the year.
Central bank officials may feel that it is unfair and unreasonable for the government to pass the burden for restructuring work to them. But they also seem to sound barely persuasive in insisting that injecting capital into policy banks should be handled mainly by fiscal policymakers.
Some economists suggest the BOK needs to go beyond the proposal of limited quantitative easing to help foster public confidence in the future of the economy.
They point out that while Japan failed in its lukewarm push for quantitative easing in the early 2000s, the U.S. Federal Reserve’s QE drives in the wake of the 2008 financial crisis were successful because they were carried out promptly with certain inflation and employment targets set as specific conditions for their continuous implementation.
Sung Tae-yoon, professor of economics at Yonsei University in Seoul, proposed in a recent commentary that the BOK should pursue a full range of quantitative easing under such “forward guidance” to convince businesses and consumers of its resolve to revitalize the economy and curb deflation.
By Kim Kyung-ho (khkim@heraldcorp.com)