Concerns about Capital Flight Materializing?

More than US$2 billion flowed out of the South Korean stock market in April alone after the U.S. interest rate rose above that of South Korea.
More than US$2 billion flowed out of the South Korean stock market in April alone after the U.S. interest rate rose above that of South Korea.

Foreign capital outflow from South Korea is accelerating after U.S. interest rates rose above South Korea’s benchmark rate. More than US$2 billion flowed out of the South Korean stock market in April alone amid a slowing inflow of bond funds, causing a deficit in the nation’s capital account.

The Bank of Korea announced on May 9 that foreign securities investment decreased by US$1.4 billion last month, with the outflow of foreigners’ stock funds reaching US$2.04 billion. The flight was caused by a rise in the U.S. Treasury bond yield and a stock split by Samsung Electronics.

The outflow of foreign stock funds was US$3.63 billion in February this year. In March, the nation saw an inflow of US$170 million.

Bond funds, in the meantime, flowed in at a slower pace although inflow continued amid ameliorating inter-Korean relations. The inflow totaled US$640 million last month, smaller than US$2.35 billion in February and US$960 million in March.

U.S. interest rates rose higher than South Korea’s key interest rate in March as the Fed raised its benchmark rate to 1.50% to 1.75%. At that time, the South Korean monetary authorities said that no significant capital outflow would occur despite the interest rate reversal. Now, however, capital outflow has started and is expected to speed up as the Fed is likely to announce another rate hike next month.

Besides, the 10-year US Treasury bond yield, which is approximately 3% now, is putting pressure on the Bank of Korea. On April 25, the yield temporarily reached 3.03%, the highest level since January 2014.

Capital flight is causing serious problems in emerging countries. For example, Argentina raised its benchmark rate from 27.5% to 40% during the recent 10 days, but the U.S. dollar outflow is showing no signs of easing. Argentina already applied for an IMF bailout.

Experts point out that the impact of the outflow on South Korea is likely to be rather limited in comparison to other emerging countries because the likelihood of inter-Korean economic cooperation is rising and South Korea’s economic indicators such as current account surplus are favorable. Still, it should not be complacent as a growing number of factors are weakening the Korean currency.

Under these circumstances, the Bank of Korea is increasingly expected to raise its key rate in July. The bank’s Monetary Policy Committee, which determines the interest rate, recently appointed new members who are in favor of an interest rate hike.

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