South Korea this week will package a new rescue package for the aviation and other mainstay industries including a bond purchase program to sustain companies against the challenges posed by the coronavirus pandemic.
This week’s emergency meeting chaired by the president is expected to contain measures to aid companies facing immediate liquidity woes. The relief program could reach 20 trillion won ($16.4 billion), given the growing list of struggling sectors besides aviation including machinery, energy, shipbuilding and shipping. The amount could snowball if it includes automobiles and related sectors considering their importance in the Korean economy.
The finance ministry said no specific agenda has been set for the fifth round of cabinet meetings on the economy. The government has been holding one every week, announcing fresh multibillion-dollar programs to address the havoc caused by the outbreak.
One idea being floated is injecting funds in the state-run Korea Development Bank (KDB) to have it purchase bonds directly from companies under repayment obligation.
The policy bank is already short in capital from its increased bailout role during the crisis. The bank contributed the largest share of 16.6 trillion won in the country’s 100-trillion-won rescue package to help stabilize financial markets and protect livelihoods amid the coronavirus turmoil.
KDB’s financial health is not in good shape. As of late 2019, its BIS capital adequacy ratio stood at 13.97 percent compared to the average 15.25 percent of local commercial banks.
In a preemptive measure to secure capital, the KDB board stretched the bank’s issuance limit of subordinated bonds to 4 trillion won this year.
To recapitalize the KDB, the government would have to seek additional budget requiring legislative approval. It would also need to amend related KDB laws. Given the limited state budget, it is unclear how much money the government could afford to back the bank.
Another option is the government backing the sale of corporate bonds on the market. This would facilitate company efforts when they want to refinance their debt in the regular credit market.
This is not the first time the Korean government has guaranteed corporate notes. During the 2008 financial crisis, the state backed $100 billion worth of foreign-denominated debt of local banks so that they could borrow money at a favorable rate.
While this method does not require the government’s direct budgeting, it still needs the approval of the National Assembly. It also runs the risk of distorting the bond markets. In the 2008 case, commercial and state lenders faced a temporary confusion in their lending rates.
By Choi Seung-jin, Yang Yeon-ho and Kim Hyo-jin
[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]