[Q&A] Lee Ju-yeol Warns of Debt Investment... "Concern Over Excessive Leverage Investment"

Stock Market Corrections and Unbearable Losses: Stock Investment Is the Investor's Choice

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] Lee Ju-yeol, Governor of the Bank of Korea, recently issued a warning regarding the so-called 'debt investment'?borrowing money to invest?in relation to the overheated stock market.

Governor Lee stated at a press conference immediately following the Bank of Korea's Monetary Policy Committee meeting on the 15th, "If investments are made using borrowed money, price adjustments could lead to losses at levels that are difficult to bear."

He continued, "Looking at stock price trends and indicators, it is true that the recent pace of increase is much faster than in the past. Stock prices could be adjusted due to shocks such as changes in major countries' monetary policy stances, unexpected geopolitical risks, and disruptions in the supply of COVID-19 vaccines."

The following is a Q&A session with Governor Lee.

- Amid the ongoing third wave of COVID-19, how much of an impact do you expect on the economic growth rate for the first quarter of this year?

▲ Due to the intensification of COVID-19 spread domestically, social distancing levels have been raised. Consumption is showing a more sluggish pattern than forecasted in November. The impact of the third wave of COVID-19 is expected to be much greater than during the previous two waves. However, exports and facility investments, mainly in the information technology (IT) sector, are showing favorable trends, so the growth forecast for this year is not expected to differ significantly from the November projection.

- The government's COVID-19 vaccination plan is becoming more concrete. Is there any difference from the vaccine introduction scenario assumed in this year's economic forecast?

▲ Looking at recent domestic and international vaccine progress, it appears that the timing has been advanced by about one quarter compared to the November economic forecast. Major advanced countries such as the UK and the US have already started vaccinations, and domestically, the goal is to begin next month. The government is expected to soon announce a detailed vaccination plan. The Bank of Korea will take this into account.

- The KOSPI index has recently surged sharply, leading to concerns about a bubble. What is your view on the bubble debate?

▲ Looking at the KOSPI over time, the upward trend has intensified since November and has continued. It surpassed 3,000 for the first time ever. Externally, in the US, with the new government confirmed, the passage of stimulus packages, and early supply of COVID-19 vaccines, investors' risk appetite has increased. Domestically, exports are strong, and stock prices continue to rise sharply based on corporate earnings outlooks and expectations. To determine whether this is a bubble, objective evidence of investors' risk-seeking behavior is needed. However, it is very difficult to judge this in advance. Generally, indicators used to assess stock price trends show that the recent pace is indeed much faster than in the past.

- Household loans increased by 100 trillion won last year. Is there a risk of defaults?

▲ Household debt increased significantly last year. There were unavoidable aspects in the response process. However, the level of household debt in Korea was already high before COVID-19. With last year's rise in housing prices, the speed of debt increase also accelerated, raising concerns about defaults. Therefore, there will be macroeconomic burdens, and this has long been emphasized as an area to watch closely. Although household debt surged last year, in the short term, interest rates have fallen and the average loan maturity has lengthened. As a result, the debt service ratio (DSR) has decreased, and delinquency rates remain low. At this point, the likelihood of a significant increase in household debt defaults is considered low.

- As stock prices repeatedly hit record highs, more individual investors are entering the market using credit. What is your view on this?

▲ After the sharp shock caused by COVID-19, very accommodative monetary policy stances were maintained to mitigate the impact and stabilize the financial market, which was in difficulty at the time. Unprecedented measures were also taken during this process. Although these policies were unavoidable, we have always been cautious about the extent to which financial imbalance risks might accumulate. Expansion of investments based on excessive leverage could lead to losses that investors find difficult to bear if price adjustments occur due to unexpected shocks. While investing within one's capacity to bear losses is an investor's choice, investments made with high leverage are being watched carefully. Investors should keep this possibility in mind.

- There is heated discussion about tapering in the US recently. Is an exit strategy within this year realistic?

▲ Currently, small business owners, self-employed, and other vulnerable groups are facing considerable difficulties, and uncertainties about economic recovery remain high. Considering real economic conditions, normalizing various measures or changing the interest rate policy stance is not something to consider at this time. It is still too early to mention a policy stance shift. While the US Federal Reserve's policy decisions are a major consideration, they do not always correspond one-to-one. The speed of normalization naturally varies depending on each country's circumstances. The prolonged accommodative stance in the US gives us more room to maneuver, but we do not simply follow it. Decisions on maintaining or reducing accommodation will be made based on each country's situation.

- When do you think the Bank of Korea's direct and indirect liquidity support for companies should be concluded?

▲ We have expanded financial intermediary support loans and lowered loan interest rates. We also established and operated a corporate bond and commercial paper (CP) purchase facility. These measures are not intended to support marginal companies but focus on alleviating funding difficulties for companies facing temporary liquidity shortages. The Bank of Korea will decide on ending these temporary support measures upon maturity, carefully considering both their sustained effects and side effects. However, since the resurgence of COVID-19 has led to sluggish face-to-face services and ongoing difficulties mainly for small business owners, self-employed, and temporary daily workers, we do not think it is appropriate to withdraw support hastily.

- The political sphere is discussing the payment of a fourth disaster relief fund. Which do you think is more appropriate: selective or universal support?

▲ Whether to provide a fourth disaster relief fund is a matter for the government and the National Assembly to consider various factors and reach a reasonable conclusion. Personally, I believe selective support is more appropriate in the current situation. We need to consider ways to use limited resources efficiently. Supporting small business owners and vulnerable groups, who have been most affected, will accelerate economic recovery and align with efficient resource allocation.

- China is close to issuing a central bank digital currency (CBDC), and the US Treasury is actively responding. There are calls for the Bank of Korea to accelerate CBDC development as well.

▲ In Korea, the payment and settlement service market is well developed, so there is not a strong need to issue a CBDC in the near future. However, since the payment and settlement environment is changing rapidly and the need for CBDC issuance may increase accordingly, we have begun full-scale CBDC research. The positions of major countries such as the US, Europe, and Japan are not different. While immediate use is unlikely, they are conducting related research. Before introduction, we conducted external consulting last year to identify institutional issues to be addressed and to determine operational processes. This year, we plan to build a pilot system in a virtual environment to test performance and safety issues. I believe our CBDC research is progressing faster than that of major countries. We have agreed to share this research with major countries and will actively participate in joint research going forward.

- The spread between 3-year and 10-year government bonds has widened compared to previous years. Do you consider the current shape of the yield curve natural?

▲ It is true that the spread between short- and long-term government bond yields has widened. However, the recent rise in domestic long-term interest rates is largely due to market participants' expectations about the direction of economic policies that major countries will pursue and their impact on the economy and inflation, as well as caution about bond supply and demand. This is a common phenomenon among major countries. Evaluating whether the current degree of the yield curve and the short- and long-term interest rate spread is appropriate requires considering the underlying causes of the spread and the domestic and international financial and economic conditions together.