COVID-19 liquidity flowing into savings accounts

An official from Hana Bank holds U.S. dollars at its headquarters in Seoul, May 6. Yonhap

By Lee Min-hyung

The government's plan to reinvigorate the virus-hit economy by expanding liquidity is bringing about an unintended consequence, as people here turned out to have increased their savings in banks in the first half of this year when the virus panic reached its peak, data showed Monday.

This goes against what the Bank of Korea (BOK) and financial authorities expected when they came up with a series of large-scale stimulus packages amid fears of longer-term economic downturn in line with the COVID-19 pandemic.

The central bank and the government placed a top priority in supplying massive liquidity to the market with the theoretical belief that it would help the sagging economy bounce back.

But data released by the central bank recent showed otherwise. As of the end of June, the amount of local banks' savings reached 1,858 trillion won, up by 108.7 trillion won, compared to the end of 2019, according to the BOK.

This is the fastest-ever half-yearly rise, it noted. On a monthly basis, the figure surged month-on-month by 35.9 trillion won in February and 33.4 trillion won in March, when the nation was gripped with a rapidly increasing number of confirmed cases.

But the increase in June came in at only 18.6 trillion won, as the virus-related uncertainty started being cleared away.

The amount of loans offered to companies, the self-employed and households in the first half of 2020 also increased by 118.3 trillion won, compared to the end of last year. The BOK analyzed that they have received loans and saved cash in bank accounts to brace for any worst-case scenarios regarding the virus shock.

“A growing number of households and enterprises appear to have taken out loans for cash amid the economic crisis,” a banking industry source said. “Chances are they did not spend the money and placed it in their savings accounts, as borrowing money from banks does not come as a serious financial burden amid the prolonged low interest rate.”

In May this year, the central bank cut the base rate to a record low of 0.5 percent, as part of its monetary easing to rev up the economy.

But the central bank and financial authorities are in a growing dilemma, as their monetary policy and a series of pump-priming measures unexpectedly end up confusing the market.

The liquidity expansion was an unavoidable decision by the authorities not just from Korea, but also the United States, as the virus panic has weighted heavily on the global economy.

Despite the move, a large amount of the liquidity flowed into the real estate market here, which did little good in terms of revving up the economy and only caused a housing price surge.

Last week, Vice Finance Minister Kim Yong-beom also expressed concerns over the rising household savings.

“Some argue that safe consumption is more difficult than a lack of demand,” Kim said. He added that the ministry is concerned over whether households will increase spending soon after the pandemic comes to an end.