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South Korean assets rallied on Monday after the government pledged at least 50 trillion won ($34.8 billion) to prop up credit markets, easing concerns about rising default risks in the key sectors including real estate.
The Kospi index advanced as much as 2%, with shares of brokerages and builders such as Kiwoom Securities Co., Meritz Securities Co. and Dongbu Corp. notching up gains. Government bonds rose across the curve while the won jumped as much as 0.8% against the dollar before paring its rise.
South Korea will expand its “liquidity supply program†to prevent a credit squeeze roiling corporate bonds and other short-term money markets, Finance Minister Choo Kyung-ho said. The move marks one of the biggest rounds of financial support for markets since steps at the onset of the pandemic. Some analysts cautioned that even more may be needed ahead.
Risks rise in Korea’s local credit market as yields spiked to the highest in more than a decade, after a rare default on commercial paper by the developer of Legoland Korea theme park in Gangwon province late last month. That fuelled broader worries about real estate firms already weakened by surging borrowing costs, as the central bank hikes interest rates to fight inflation. Property debt strains are spreading in Asia following a crisis in the sector in China.
In a sign of particular concern regarding commercial paper — which property and other companies use to meet short-term payments — the nation will resume purchasing such securities along with corporate bonds, first injecting 1.6 trillion won from a 20 trillion won bond stabilisation fund.
The latest government moves “will help stabilise market sentiment but there is a problem with policy consistency at a time of aggressively hiking rates to tame inflation,†said Heo Pil-Seok, chief executive officer at Midas International Asset Management.
The Bank of Korea raised its seven-day repurchase rate by a half-percentage point to a 10-year high of 3% earlier this month.
The Kospi Index got a boost on expectations that the credit pledge would offer support to brokerages with exposure to commercial paper and builders that depend on developers for business.
Among the brokers, Meritz Securities gained as much as 10.5%, Kiwoom Securities jumped 9.9% while Samsung Securities Co rallied 5.5%. Construction company Dongbu surged 24.3%, the biggest advance in six years, and its peer DL E&C Co. climbed the most since February 2021.
Three-year government bond yields slid 19 basis points to 4.31% while 10-year rates fall 16 basis points to 4.49%.
But, caution persisted in some markets, with the yield on three-month commercial paper rising eight basis points to 4.33%, the highest since January 2009. Some of that may have been due, however, to the fact that yields on such instruments often have a time lag between actual trades in the securities and the publication of their market rates. There were few credit transactions on Monday morning after the government steps were unveiled.
South Korean President Yoon Suk Yeol said that the government will implement the measures to help resolve the financial difficulties faced by small and medium-sized companies.
—Bloomberg