IMF Supports 'Selective Distribution' of Disaster Relief Funds... "Resumption of Short Selling is Desirable" (Comprehensive)

Korea Has High Proportion of Self-Employed... Research Needed on Income and Sales
Stock Market Stability and Possible Resumption of Short Selling

[Image source=Yonhap News]

[Asia Economy reporters Jang Sehee and Moon Chaeseok] The International Monetary Fund (IMF) has expressed the opinion that selective distribution of disaster relief funds is effective in relation to the direction currently advocated by the political sphere. While an expansionary fiscal stance should be maintained to respond to the novel coronavirus infection (COVID-19), it advised that liquidity should be withdrawn and corporate restructuring promoted after the crisis has passed.

Andreas Bauer, head of the IMF mission, stated at a briefing on the '2021 IMF Article IV Consultation Results' held via video conference on the 28th, "In a situation where COVID-19 recovery is proceeding unevenly, fiscal measures should be selectively focused on the parts that are more severely affected." He viewed selective support as useful in stimulating consumption effects and securing fiscal soundness.

Regarding the 'legislation of loss compensation for small business owners,' he said, "It is desirable to establish a permanent safety net for self-employed individuals," and emphasized, "Attention should also be paid to the fact that Korea has a relatively high proportion of self-employed people compared to other OECD member countries." However, he noted that in-depth research is needed on whether income and sales can be tracked in the future and on plans to secure fiscal soundness going forward.

The IMF suggested that the debt-to-GDP ratio that Korea can bear is 60%. In the short term, considering the downside risks to economic recovery, it analyzed that additional fiscal and monetary policy easing would accelerate the pace of economic normalization. However, the IMF advised that once the economy recovers, the liquidity injected should be withdrawn and corporate restructuring promoted. This is interpreted as stemming from concerns that liquidity released due to COVID-19, if used to support marginal companies, could reduce the overall competitiveness of the industry. The IMF advised, "As the economy recovers, the main purpose of support needs to shift from liquidity supply to selective measures aimed at promoting corporate restructuring and enhancing survival prospects."

Regarding short selling, which is the biggest concern surrounding the domestic stock market, it stated, "Considering the Korean economic situation, resumption of (short selling) is possible."

He said, "A blanket ban on short selling to secure an equal market is considered an unsharp response," and "It can involve very high costs in terms of market efficiency." This means that when stock prices fall, the downward pressure increases, which could heighten market instability.

Meanwhile, on the rapidly increasing household debt, he added, "Macroprudential policy operations to mitigate risks appear to be appropriately implemented, but if household debt continues to increase rapidly, it will be necessary to raise the level of regulation."

Domestic experts expect that issues related to marginal companies will become prominent once loan maturity extensions and interest payment deferrals end, in response to the IMF's recommendations. Professor Lee Inho of Seoul National University’s Department of Economics said, "When the COVID recovery phase comes, it means letting those who should fail in the real economy fail and be restructured," and added, "Also, the released funds should be directed toward stable investments."