[Q&A] Lee Ju-yeol: "Shock from 3rd COVID-19 Wave Bigger than August... Exports to Grow Next Year"

Bank of Korea Keeps Base Rate at 0.5% on 26th
Growth Rate Revised Up to -1.1% This Year, Forecast for Next Year at 3.0%
"Assuming COVID-19 Continues Throughout This Winter"

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] Lee Ju-yeol, Governor of the Bank of Korea, stated on the 26th, "The economic shock caused by the third wave of the novel coronavirus infection (COVID-19) will be smaller than at the beginning of the year but somewhat larger than during the resurgence in August." He explained that if the COVID-19 resurgence continues this winter and social distancing levels are raised, it will have a short-term impact on our economy, especially the consumption sector.

Governor Lee made these remarks at a press conference immediately following the Monetary Policy Committee's main meeting, saying, "The economic outlook for this year and next was made on the premise that the COVID-19 resurgence will continue throughout this winter."

However, Governor Lee noted that since countries are continuing economic activities despite the spread of COVID-19, the export recovery trend is expected to continue. He said, "The possibility of export decline due to global production disruptions like those at the beginning of the year is not considered very high," and added, "Looking at the entire next year, exports centered on key products such as semiconductors and automobiles are expected to be positive."

Reflecting the export recovery trend and the third-quarter growth rate (1.9%), the Bank of Korea revised its growth forecast for this year upward from -1.3% to -1.1%. The growth forecast for next year was also raised from 2.8% to 3.0%. The growth rate for 2022 was presented as 2.5%. Considering ongoing uncertainties, the base interest rate was kept steady at 0.5%.

The following is a Q&A with Governor Lee.

- Was the upgrade to social distancing level 2 reflected in this growth forecast?

▲ This growth forecast was made on the premise that economic activity restrictions will be significantly eased as COVID-19 gradually subsides in the mid to late next year. It was assumed that the domestic COVID-19 resurgence will continue throughout the winter period. If the COVID-19 resurgence continues this winter and social distancing levels are raised, it will have a short-term negative impact on our economy, especially consumption. Compared to the COVID-19 resurgence at the beginning of the year and in August, the impact on the economy is expected to be smaller than at the beginning of the year but somewhat larger than in August.

- You raised the annual growth forecast; can this be seen as entering an economic recovery phase?

▲ The third-quarter results this year were better than initially expected, and the current economy, having bottomed out in the second quarter, has passed the worst phase. The basic forecast is that next year will show a moderate recovery centered on exports and investment. However, considering concerns that the spread of COVID-19 has not subsided domestically or abroad and may even expand further for some time, I do not think the current economic trend can be considered as having fully entered a recovery phase.

- You raised the annual growth forecast; should we see the export recovery as stronger than private consumption? What is the export outlook after the fourth quarter and into next year?

▲ This year, exports and facility investment have shown better-than-expected trends, and the third-quarter results were also favorable, leading to the upward revision of the growth forecast. Exports are recovering centered on semiconductors, and domestic facility investment is also expected to expand, which informed the outlook for next year. Although the negative impact of the COVID-19 resurgence remains significant, exports are expected to be better than anticipated to some extent, overcoming some of the negative effects.

▲ Despite the COVID-19 resurgence, countries are showing movements to keep economic activities open without lockdowns (shutdowns). Even in difficult situations, demand for non-face-to-face services has increased significantly. Our country's exports have strengths in semiconductors and IT, and exports are currently recovering rapidly, centered on IT. The recent daily average export volume has practically recovered to pre-COVID-19 levels. Whether this trend will continue remains to be seen, but exports, especially in the IT sector, have recovered considerably since October. As at the beginning of the year, the possibility of a global production disruption causing export declines is not considered very high. Looking at the entire next year, exports centered on key products such as semiconductors and automobiles are expected to be positive.

- The won-dollar exchange rate continues to decline; what impact does this have on exports?

▲ It is true that the won-dollar exchange rate has declined faster compared to other major currencies. Factors behind the rapid appreciation of the won include relatively favorable domestic economic indicators and improved investment sentiment following reduced uncertainty after the U.S. presidential election. I also believe there has been some market sentiment concentration. Generally, a declining exchange rate negatively affects our exports. However, the magnitude of the impact may differ from the past. Considering the high quality competitiveness of Korean export products and the fact that many domestic companies have production facilities overseas, it is true that the impact of exchange rates on exports has decreased compared to the past.

▲ However, a rapid decline in the won-dollar exchange rate over a short period is undesirable. It directly affects the profitability of export companies, so rapid short-term declines are a concern. If exchange rate volatility expands, companies face additional uncertainties, which ultimately burdens the real economy. If exchange rate concentration occurs, I believe active market stabilization efforts will be necessary.

- What are your thoughts on the movement to add employment stability as a goal in the Bank of Korea Act?

▲ Adding employment stability to the Bank of Korea Act has expected positive effects on the overall national economy. However, in practice, adding employment stability to the monetary policy objectives in the Bank of Korea Act presents constraints and difficulties, such as potential conflicts with other goals. Other countries that have included employment stability responsibilities do not necessarily have separate policy tools for employment stability. We will continue to review and consider how we can contribute more to revising this purpose clause, not necessarily limited to means but focusing on fulfilling the purpose. We also plan to actively participate in the National Assembly's discussion process.

- Recently, household debt has been rising sharply, housing prices are increasing, and there are concerns about delays in restructuring marginal companies. Do you see a need to recover liquidity through interest rate adjustments?

▲ Household loans have been a concern for a long time. Household debt exceeding income ultimately restricts household repayment capacity and consumption, burdening the macroeconomy. We cannot help but be concerned about the speed of household debt increase. However, the loss absorption capacity and financial soundness of financial institutions remain good, so there is no immediate short-term risk concern. Nevertheless, policy authorities should operate policies with vigilance regarding the speed of debt increase.

▲ We are not overlooking the issues caused by prolonged low interest rates. However, when operating monetary policy, the macroeconomic situation must be prioritized. Since economic recovery remains uncertain due to COVID-19, it is not yet appropriate to prematurely withdraw the accommodative stance. We are not at the stage to change the monetary policy stance and are not considering it at present.

- Large-scale government bond issuance is planned again next year; what is your view?

▲ Fiscal policy will need to support economic recovery next year, and new New Deal policies are expected to be promoted, so government bond issuance volume is expected to increase. There are genuine concerns about supply-demand imbalances in the bond market. The market is interested in whether guidelines such as regular government bond purchases are necessary. The Bank of Korea will continue to closely monitor market interest rate volatility to prevent excessive fluctuations due to supply-demand changes, as it has done so far. We will consider and deliberate whether it is necessary to announce the scale and schedule of government bond purchases in advance.

- Janet Yellen has been nominated as the first Treasury Secretary of the incoming Joe Biden administration. What impact will this have on the domestic financial market?

▲ Janet Yellen is a reasonable person. The predictability of her nomination is expected to have a favorable effect on the market. Having a predictable person nominated will also significantly help improve our sentiment. However, when implementing policies, the overall platform and policy direction of the new Democratic government will largely dominate.

- The KOSPI recently reached a record high; is this level consistent with our economic fundamentals?

▲ The stock market's boom compared to the real economy reflects investors' sentiment. The sharp rise in the stock market reflects expectations of the end of the pandemic, the belief that there will be no sharp market crashes like in the past, and the maintenance of promising sector earnings due to explosive demand growth. Rather than the level of overheating in the stock market, we are observing how it will behave if a correction process occurs.