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Enjoying Net Capital Inflow of 154 Billion Won Despite Imminent Financial Crisis in Emerging Economies
Korean Bond-type Funds
Enjoying Net Capital Inflow of 154 Billion Won Despite Imminent Financial Crisis in Emerging Economies
  • By matthew
  • August 26, 2013, 07:50
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It has been found that the money drain from bond-type funds is slowing down in spite of the possibility of a foreign exchange crisis in India and the Fed’s remarks on the end of the quantitative easing. 

According to the Korea Financial Investment Association (KOFIA), the 30-year government bond yield topped 4% this week, as the bond market has been losing steam due to the announcements on the reduction of quantitative easing. In addition, investors are taking their funds out of emerging nations, raising concerns over the sell-off of won-denominated bonds in Korea. 

However, experts are saying that the sentiment of foreign and domestic bond investors is getting better. According to KOFIA’s data, no less than 1,864.4 billion won (US$1.6 billion) and 755.6 billion won (US$678.5 million) were withdrawn out of domestic bond-type funds (excluding exchange traded funds) in June and July each, but approximately 154 billion won (US$138 million) has flown into them in August. The resale amount is plummeting for overseas bond funds, too. 

Nevertheless, financial market participants are getting more and more nervous, as the possibility of a financial crisis is looming large in India. Those in the other BRIC nations and emerging economies in Asia are also already panicked over the acceleration of capital outflow. Fortunately for Korea, however, the impact is rather limited on the local bond market for now. The bond balance has fallen from 103.2 trillion won (US$92.67 billion) to 100.9 trillion won (US$90.68 billion) between July 22 and this month, but things look better than in India or Indonesia. 

Bond market experts are attributing the differentiation to the strong fundamentals of the Korean economy. “It is no stretch to say that Korea is free from financial shocks as of late,” said Shinyoung Securities analyst Hong Jeong-hye, adding, “During the recent financial crisis, foreign funds flew out to cause the currency swap rate to drop and a widening spread to be formed, but things are the other way around these days, that is, Korea is succeeding in maintaining stability thanks to solid financial and economic structures.”

Some people are pointing out, though, that it is too early to be content. They are mentioning that the crisis from India could spread to other countries to cause won-denominated bonds in those regions to be put on the market all at once. Malaysia and Thailand are in possession of won-denominated bonds worth a total of 7,395 billion won (US$6.641 billion) and 7,386 billion won (US$6.632 billion), respectively. The amount is estimated at around three trillion won (US$2.694 billion) for each of India, Indonesia, and Turkey, too. 

“The local bond market is showing a few signs of instability despite the possibility of the next Indian financial crisis and the capital outflow from bond-type funds seems to have finished for now,” said an asset manager, continuing, “Nonetheless, it is also true that the foreign exchange crisis in India will take time to be resolved, and we need to keep a close watch on the Southeast Asian and BRIC financial markets for a while, with care and prudence.”