Bank of Korea Deputy Governor advises country to cheer up

Bank of Korea Deputy Governor Lee Jong-ryeol believes that excess worries about the economy are unwarranted and could increase risks and hamper recovery, according to a post on the central bank's blog.

Bank of Korea Deputy Governor Lee Jong-ryeol speaks at a press conference on Sept. 22. [YONHAP]

Bank of Korea Deputy Governor Lee Jong-ryeol believes that excess worries about the economy are unwarranted and could increase risks and hamper recovery, according to a post on the central bank's blog.

“It is necessary to be actively ready for dangerous factors ahead, but the mistakes of excessively stretching the interpretation of risks or underestimating the ability to respond to the danger unlike in reality should not be made,” Lee wrote.

“As much as the government and Bank of Korea are putting in effort on policy to minimize the impacts, the current risks are manageable through right policy responses,” he added.

To justify his optimism, he pointed to the Financial Stress Index (FSI) and Financial Vulnerability Index (FVI).

The FSI for Korea rose to a level that signals “danger” last and remained elevated until the latest finding in November, indicating that the economy is still under stress. But Lee said the FSI is far below the level seen during the 2008 global financial crisis. The FSI in the period was 57.6.

The FVI, which measures dangers in household finances, was 44.9 in the third quarter of last year compared to 73.3 during the global financial crisis.

“Indicators measuring soundness, like default rate, remain at a moderate level and financial institutions have sufficient levels of capital. Partial insolvency of project financing loans can be be manageably absorbed by our financial system,” Lee said.

A total of 30 trillion won ($24 billion) of project financing loans face maturity in the first quarter.

A screen capture of a report written by Bank of Korea Deputy Gov. Lee Jong-ryeol on the central bank’s blog on Jan. 9. [SCREEN CAPTURE]

Not everybody shares Lee's optimism.

“The currently low default rate is largely due to the impacts of the government’s support measures, so problems can arise any time its effectiveness wanes,” said Sung Tae-yoon, professor at Yonsei University’s School of Economics. “Active management is needed because the amount of loans for mortgages is often big, and the risks could spread to the financial system.”

This is just the beginning of the problems, some argue.

“Asset Backed Commercial Paper for real estate project financing usually matures in three months, so they may not be refinanced whenever the real estate economy isn’t favorable,” said Seok Byoung-hoon, an associate professor teaching economics at Ewha Womans University. He said the current situation is a “time bomb” as the number of unsold houses can pile up if major apartments projects are not sold out.

More than 70 percent of those surveyed by the Korea Chamber of Commerce and Industry agreed that 2023 will be the first year when low growth becomes permanent. Eighty-five people, including professors and researchers, were surveyed from Dec. 16 through 19.

They forecast Korea’s economy to grow 1.25 percent this year, lower than the Bank of Korea’s 1.7 percent projection and the finance ministry’s 1.6 percent.

“If the authorities offer optimism that’s distant from the reality, that could increase concerns in the market,” said Kim Jung-sik, emeritus professor at Yonsei University’s School of Economics. “At this point, caution is needed because there are lots of forecasts that recession will begin in full swing starting this year due to the monetary tightening in the United States.”

BY JIN MIN-JI, KIM NAM-JUN [jin.minji@joongang.co.kr]