Banks’ Risk Aversion to Delay Recovery
By Kim Jae-kyoung
Staff Reporter
Local banks' reluctance to supply liquidity to the economy has intensified a liquidity problem here, delaying a much-awaited economic recovery, according to Standard Chartered Bank (SCB).
In its 2009 global outlook report, the global bank said that the current liquidity problem is largely due to risk aversion among financial institutions.
``This unwillingness to supply loans will make a recovery more difficult to achieve through rate cuts, implying a more entrenched slowdown in 2009,'' it said, expecting a financial restructuring process involving deleveraging and recapitalizations.
``Financial firms need to recapitalize and deleverage themselves in order to reduce their risky asset exposures,'' it added. ``Once a clearer picture emerges on the global credit crisis outlook and the restructuring process sees good progress, there should be some beginning of a recovery from the second half of 2009.''
The British lender forecast that sluggish domestic and external demand will limit real gross domestic product growth for the Korean economy to 1.4 percent in 2009, saying that aggressive rate cuts will be accompanied by active public spending.
``The Bank of Korea will concentrate on the risks of deflation amid weak domestic demand caused by the credit crunch. We expect the key rate to continue to be cut aggressively, going down to 2.0 percent by the second quarter of next year,'' David Mann, head of Korea Research at SCB, told The Korea Times.
``The actions to boost liquidity through foreign exchange swap auctions and a broadening in the acceptable collateral for repo operations shows that policy makers are already reacting to extraordinary circumstance with less traditional policies,'' he added.
The report forecast that the won's appreciation trend should resume by the second half of 2009. It expects the average won-dollar exchange rate to fall to 1,150 won per dollar for 2009 and 1,100 for 2010.
It pointed out that reserve foreign exchange swaps and some increases in existing swap lines with China and Japan will help to curb further depreciation pressure on the local currency.
It also said that the current account should be just about in balanced in 2009, as falling import demand offsets sluggish exports.