The government and the financial sector are watching closely as financial insecurities in emerging markets such as India and Indonesia, insecurities that were triggered by concerns of decreases in US quantitative easing, may affect the Korean capital market. The government is responding differently than most emerging economies. There’s a low chance that this will spread to become a second foreign exchange crisis, but the government has already started its cautionary actions, such as increasing market monitoring.
Hyun Oh-seok, Deputy Prime Minister for the Economy, who concurrently serves as the Minister of Strategy and Finance, met with the press following a Ministerial meeting on August 21.
In response to whether or not signs of a financial crisis in emerging Asian economies would spread to Korea, he said, "We’ll have to keep our eye on how things turn out, but Korea does seem to be different." The Deputy Prime Minister for the Economy said, "Korea has inflow of capital in the stock market and exchange rate volatility isn’t high. The foreign exchange and financial markets can get shocks. We’ll watch the timing of quantitative easing and the flow of international financial markets with caution.”
The Ministry of Strategy and Finance also said, in a report titled Recent Trends in Asia’s Financial and Foreign Exchange Markets and Its Effect on the Korean Economy, that “Korea is relatively stable compared to other emerging economies in Asia in terms of exchange rate, stock prices, CDS premium, and foreign capital inflow.” CDS stands for credit default swap.
In the case of this potential financial crisis for emerging economies, the stock market predicts that “hot money” seeking short-term profits following US quantitative easing was focused on Indonesia and other Southeast Asian countries that are at the forefront of a financial crisis. “Indonesia has had the most inflow of hot money from quantitative easing. Its stock market has jumped 17 times since 2003,” said Lee Eun-taek, researcher at Dongbu Securities. “Korea has had much less hot money, so it’s difficult to see them in same light,” he explained.
Some forecast that the capital that left emerging markets could be pulled into the Korean stock market. Cyclical components of leading economic indicators have been on the rise for three consecutive months, showing that Korean economic momentum remains firm compared to emerging economies. The Korean economy has a higher dependency on foreign economies compared to emerging economies, so the upswing in US and European economies can lift Korea along.
In fact, while foreign investors are net selling in Indonesia, Thailand, and Taiwan, they are buying over US$5 million in Korea. “As Korea’s differentiated economic momentum is highlighted, the value of the won is stabilizing and the stock markets are seeing the inflow of foreign capital,” said Park Jung-sub, researcher at Daishin Securities. In effect, the capital that leaves other emerging economies in Asia could flow into the Korean stock market,” he analyzed.
Liquidity of foreign currency is also showing different movements from other emerging economies. According to the Korea Center for International Finance, Korea’s CDS premium on August 20th was at 88bps, similar to the previous day. The CDS premium, which was around 91bp at the end of June, fell by 3bp to 88bp by the end of July. In contrast, the CDS premium in Indonesia rocketed by 50bp within 20 days, from 214bp on August 1 to 263bp on August 20. In the same period, the CDS premium also increased in Thailand and Turkey, by 34bp and 24bp each. “The CRS rate, which evaluates the lack of foreign currency liquidity, went up from 1.58% at the end of June to 1.74% at the end of July, which is a good sign,” said Kim Kwon-sik, researcher at the Korea Center for International Finance. But it’s too early to relax.
There are still some problems remaining. Government debt, including public enterprises, is at 1,000 trillion won (US$895 billion), similar to Spain, which received a bailout. Among the 925.3 billion won (US$828.6 million) of foreign investments as of 2013, 83.6% are stocks, bonds, and debt that can be withdrawn anytime. Also, short-term foreign debt is at US$125 billion, household debt is at 1,150 trillion won (US$1,030 billion), and corporate debt is at 130% of the GDP. Therefore, it’s difficult to say that Korea is in a safe zone.
In contrast, the foreign exchange reserve is only at US$328 billion. If 20-30% of foreign investments and short-term foreign debt exits, that’s already US$237-293 billion, which can shake the economy heavily. “Foreign investors’ net buys and KOSPI moving together means that the Korean stock market can also be indirectly affected,” Kim Kwon-sik explained.