Inflow Monitoring
With the Fed’s exit strategy around the corner, billions of dollars of foreign funds withdrawn from some emerging countries are rushing into Korea, causing the Korean financial authorities to issue a warning. The government is strengthening its monitoring on foreign funds, allowing for the possibility that these could suddenly escape Korea to disturb its financial markets or result in a strong won to bring damage to its economic fundamentals.
“The inflow of foreign funds can be positive for the short term but could disturb the overall economy with time,” said a high-ranking government official, adding, “As such, we are closely monitoring the situation, providing against possible dangers.” Another government source explained, “The market direction is changing rapidly these days, thus we need to be prepared for sudden capital outflow,” continuing, “If the won appreciates, Korea’s exports and external soundness could be affected as well.”
In the meantime, foreign investors have continued buying Korean stocks since August 23. The buying spree has been ongoing for 19 consecutive trading sessions and the cumulative size has reached 8.2835 trillion won (US$7.6871 billion). The net investment is slightly below zero in the bond market and the won-dollar rate closed at 1,073.8 won to one dollar on September 22, 10.3 won down from a day earlier.
The government is trying to define the recent inflow of foreign funds. According to its analysis, the funds have come from emerging countries such as India and Indonesia, but hedge funds, investment companies’ money and sovereign funds are mixed in with them, which means it is quite uneasy to predict when they will rush out of the country. Also, it is not ruling out the possibility that foreign exchange speculators are blended in them betting on the appreciation of the Korean currency for a certain period of time.
The financial authorities are especially concerned over the inflow of funds into the stock market acting as a cause for the won’s appreciation. “The foreign exchange rate is directly related to the price competitiveness of exporters, and external soundness such as the balance of current accounts. Thus we cannot but be concerned,” the Financial Services Commission explained.
The government is going to reform its contingency plans to better reflect the market situation. Still, it is not mulling over adjusting the three macroeconomic policy packages, that is, intervention in the forex market and regulations on the forward position limit, bank levies, and repealing of tax breaks on foreign bond investors.