US QE Tapering
Many analysts point at Korea’s relatively healthy balance sheet and foreign exchange reserve as the reason that the tapering of quantitative easing (QE) will have little impact, but there is still a possibility that the US exit strategy will increasingly trigger financial market volatility, damaging the real economy. Moreover, developing countries, which will likely be most affected by the US exit strategy, will have a negative effect on Korea’s export-driven economy and lead to rising interest rates, putting strain on households and business.
The Federal Reserve Board (Fed) announced on December 18 that it will taper quantitative easing (QE) by US$10 billion a month, from the current amount of US$85 billion a month to US$75 billion a month, signaling a directional shift in monetary policy for the first time since the global financial crisis of 2008. However, the US Fed has decided to maintain a basic interest rate at the current level of 0.0-0.25 percent.
This is bound to have an impact on Korea’s relatively small and open economy, as it is susceptible to currency fluctuations from the outside, and its financial market could become volatile either by direct or indirect means. In addition, a rising interest rate is potentially threatening to households, whose snowballing debt of 1 quadrillion won (US$950 billion) consists of a significant number of variable-interest-rate-based bullet loans. There are concerns that interest rates will increase and put further pressure on domestic companies. Ultimately, if the drawdown of QE inflicts more serious damage to developing countries than expected, it will hurt Korea’s export industry, the very backbone of its economy.
But the government’s analysis is that the tapering of QE has been expected for some time, and therefore would not have a serious impact on Korea’s economy. Deputy Prime Minister of Economy and Ministry of Strategy and Finance Hyeon Oh-seok said, “In the short term, the market could be volatile and a bit of an aftershock may continue for a while, but our economy is in relative good health, and will absorb the impact with limited effects.”