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South Korea’s fiscal stimulus will endure lasting headwinds

It will reduce defaulting of loans, but also relax credit standards.

A Moody’s report has warned, South Korea’s policy response to the disruptions caused by the pandemic will provide near-term liquidity relief but may increase asset risk in the long run.

The government has announced packages of financial support totalling over $142b (KRW175t) and has eased several regulations to stabilise the economy.

The injection of liquidity into households and businesses would reduce the chance of defaulting and thereby anchor the performance of bank assets, analyst Tae Jong Ok said.

However, a prolonged implementation of these initiatives runs the risk of loosening credit standards and growing exposure to nimble borrowers. Policy banks, in particular, are in trouble because of the support they provide to pandemic-hit industries.

“The relaxing of bank regulations—including efforts to bring forward lower risk-weighted asset floors with the introduction of final revisions of Basel III credit risk calculation rules—is credit negative, because it would enable banks to raise risk assets without boosting their capital,” Ok continued.

Other liquidity rules will also be eased in the interim, but Moody’s expects banks to retain adequate funding and liquidity profiles when most regulations return to normal after 12 months.

The policy initiatives would also be credit negative for the credit card segment as any loosening of the limit on leverage ratios would allow an expansion of leverage when demand for consumer credit bounces back, the report said, but the immediate effect will be softened by strong risk aversion amongst households and credit card companies.

The central bank also extended the list of securities firms eligible as counterparties and has widened the list of eligible securities to include corporate bonds through its repo program. For insurers, the decision to allow purchases of products through recorded phone conversations will partly offset the anticipated decline in new insurance transactions via face-to-face channels, the report concluded.

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