A Warning Worth Noting
South Korea is likely to take the biggest hit from interest rate hikes by the Fed among a group of emerging countries, Goldman Sachs said in a recent report.
The report analyzes the impact of US interest rate hikes on 16 emerging countries, including South Korea, Brazil, Chile, China, the Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Poland, Russia, the Philippines, Thailand and Turkey.
According to the report, tight financial conditions are being witnessed in these countries due to the lack of currency devaluation, while US interest rate hikes are putting pressure on their stock markets and bond yields.
The report also pointed out that the downward pressure on GDP is particularly high in South Korea. Specifically, Goldman Sachs said South Korea’s GDP is estimated to fall by 0.6%, the sharpest decline among the group, each time its Financial Conditions Index shows a 100 bp decline.
Goldman Sachs added the Bank of Korea is likely to raise its benchmark rate in October, not in July as it previously forecast. As reasons, Goldman Sachs cited sluggish economic indicators, downside risks on the export side, and the real economy’s bigger importance in interest rate determination. The investment bank refrained from discussing how many times the Bank of Korea is likely to raise the key rate. Its previous estimate was twice.
In the meantime, the Fed, which raised rates in March, is expected to do so three or four more times before the end of this year.