KOSPI correction spurs policy rethink

Research evidence excerpt

KOSPI correction spurs policy rethink

Barclays | Korea

3. The view of BoK's hawkish MPC members that financial conditions are too loose

(despite the policy rate being neutral) could be undermined since financial conditions

have turned tight along with the equity market correction, in our view.

Four things the government could do

1. Market stabilisation fund: The government has a contingency plan in the form of a

market stabilisation fund, but a top policymaker noted that its use is not yet required. In

addition, the fund's current size (KRW10trn) is relatively small at only 0.22% of the KOSPI

market capitalisation and there is little empirical evidence that the fund gets used much.

2. National Pension Services (NPS): The NPS is unlikely to be able to work as a stabiliser at

the moment, as we estimate it has an outsized exposure to the domestic equity market

and thus incurred a notable loss in July. We think the NPS may need to sell some of its

overseas equities as a part of a rebalancing, but we doubt it will be able to buy domestic

equity, given still-elevated allocations to domestic equity.

3. Short sales ban: The financial regulators have past experiences of banning short sales,

but we think they are also aware of the potential costs of doing so. With the government

agenda for MSCI DM equity index inclusion, we believe a ban is very unlikely.

4. Fiscal policy: While the equity market correction is unlikely to constitute a reason in itself

for a second supplementary budget, we believe one is now marginally more likely,

especially if private consumption is impacted by the correction. We think market focus is

now more on the 2027 budget announcement at end-August, and that fiscal policy will

remain expansionary.