Ever since September, when the US reduced the release of money, foreign capital concentrated in emerging markets has been withdrawing. Financial crisis are expected in emerging markets such as India, Indonesia, Brazil, Turkey, and South Africa as currency values drop, stock prices retreat, and interest rates increase. However, the Korean market remains stable, unlike in the past.
The Korean economy is different from other emerging market nations. After June, when rumors about a US reduction of released money first appeared, the stock prices, interest rates, and exchange rates of 12 major emerging nations were compared to Korea. The Korean won increased the most, even surpassing the Chinese yuan. Interest rates (for bonds maturing in 10 years) rose 0.54%, making Korea one of the most stable nations with active stock markets, along with Taiwan. Although stock prices dropped slightly, it was still better compared to some other nations.
Furthermore, when comparing data provided by eight emerging nations (Korea, Taiwan, India, Indonesia, Thailand, Vietnam, The Philippines, Brazil), Korea saw the highest capital flow of US$1.6 billion.
“Korea Differentiates Itself from Other Nations”
Korea used to be criticized harshly whenever there was an economic crisis, but it is being treated differently this time because the basic economic grounds of Korea have changed. Factors such as the foreign exchange reserve, amount of short-term debts, and current account deficits, which were previously highlighted as weak links, have been significantly enforced.
When compared to the 2008 global economic crisis, Korea has increased 40% of its foreign exchange reserve, rising from US$239.6 billion to the current US$329.7 billion. Furthermore, the amount of short-term foreign bonds, once called the soft underbelly of the Korean economy, has decreased from 52% to 29%. The ratio of current accounts to gross domestic production has increased 2.7% from the average 0.3% (in 2008), marking 17 consecutive months of current ratio surplus. Bank soundness, which was also seen as one of the weak spots, has also improved to receive good scores. The Financial Supervisory Service said, “When international liquidity was tested in the same conditions as the 2008 economic crisis, all banks in Korea passed the test by last June.”
Michael Reed, the Korean representative of the global asset management company Fidelity, said in a recent interview with a domestic daily newspaper, “Korea has improved its basis in terms of short-term bonds and foreign reserves. It also has taken some steps to reduce the amount of change in capital outflow, improving the foreign exchange soundness. It is less likely that the economic crisis happening in other emerging nations will affect Korea.” He added, “People are nervous that another Asian economic crisis will occur with the recent breakdowns in the financial stability of India and Indonesia, but now that Korea has improved its basics, it shouldn’t worry by putting itself on the same line as the other nations.”
JP Morgan’s chief market strategist in Asia, Tai Hui said, “Since Korea is showing a continuous surplus in its current accounts, foreign investors are looking at it differently when compared to other emerging nations.”
On August 22, Fitch Group, one of the big three international ratings agencies, announced it will maintain Korea’s credit as AA-. Fitch said this was because, “The Korean economy has good fundamentals.”
Some even expect Korea to be the biggest beneficiary of this “third economic crisis.” A JP Morgan associate said, “Korea may have lost its growth in the past five years since the global economic crisis, but it gained stability instead,” adding, “It is now possible to think of Korea as a “refugee” if South East Asia falls.” The head of financial industry division of Samsung Economic Research Institute, Kwon Soon-woo said, “It will be a great opportunity for Korea if money from foreign investors can continue to flow into stock and real estate markets, while activating industrial investments and other productive sectors.”
“Korea No Longer an Easy to Get Market like in the Past”
At the beginning of the year, ten top-level figures from leading investment banks and global private equity funds met in a Japanese ryokan (a traditional accommodation with gardens) near Tokyo, Japan. The event was a private meeting designed to share information on the “Asian market.” The Asia-Pacific business finance representative of Moody’s ratings agency said, “Korea did come under some criticism for its “doctor after death” kind of reconstruction of pouring public funds into the deal, but most agreed that Korea grew tremendously and that it is now a stable and systematic market.”
Another financial figure who recently attended a meeting of global fund associates said, “A specific domestic conglomerate was mentioned (by the foreign fund associates) to have taken on a “holding company” system, and that the entire group is no longer threatened by the difficulties of one company. This is a huge change. Korea is no longer an easy to get market like it has been in the past.”
Such positive changes in the Korean economy can also be confirmed by statistics. Following the quantitative easing by the US, a lot of money went straight to national and public bonds in emerging nations. However, according to data from the Asian Development Bank, foreigners occupy only a 10% stake in the national and public bonds issued by Korea. This is one third compared to India or Indonesia, and similar to Japan (9%). A Moody’s associate said, “The Korean economy is not one of the emerging markets where global hot money (short-term capital) lingers around. This means the national economy has grown strong.”
Korea Toughens after Two Economic Crisis
Such changes in the view of the Korean national economy and finance have contributed to Korea successfully overcoming economic crisis in 1998 and 2008. Korea is now evaluated to “have know-how on how to overcome a crisis.” Former Organization for Economic Cooperation and Development ambassador Heo Kyung-wook said, “Many nations think highly of Korea’s ability to restore its economy.” In May, the Korea Asset Management Corporation (KAMCO) and the Asian Development Bank hosted a seminar on how to dispose non-performing loans for Vietnam and other South East Asian emerging nations and saw a good turnout. In addition, the Korea Deposit Insurance Corporation and export-import banks are receiving requests to host seminars on corporate support and how to restructure insolvent enterprises. KAMCO CEO Chang Youngchul said, “The Korean economy is the only model internationally to have succeeded despite the risks of bankruptcy.”
However, some foreign investors point out that the Korean economy still has some weak points. Reed said, “Since investment sentiment is very important in regards to investment itself, Korea can still experience trouble if people disregard the fact that Korea has a good economic fundamental, and consider it the same as other nations.” Hui said, “Korea’s weakest point is that it has too high household debt to have any chances for boosting domestic demands.”