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Korean Gov't Says US Stimulus Cut Won't Impact Korea
Reduced Bond Purchases
Korean Gov't Says US Stimulus Cut Won't Impact Korea
  • By matthew
  • January 30, 2014, 06:45
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Finance Minister Hyun Oh-seok chairs a meeting of senior government policymakers and analysts from the Korea Center for International Finance in Seoul following the announcement by the FOMC to cut economic stimulus on Jan. 30, 2014. (Yonhap)
Finance Minister Hyun Oh-seok chairs a meeting of senior government policymakers and analysts from the Korea Center for International Finance in Seoul following the announcement by the FOMC to cut economic stimulus on Jan. 30, 2014. (Yonhap)


SEOUL/SEJONG, Jan. 30 (Yonhap) -- The move by the US Federal Reserve to further reduce its monthly bond purchases by US$10 billion will have little impact on South Korea, the government's top economic policymaker said Thursday.

Finance Minister Hyun Oh-seok said in a meeting of government officials and market watchers in Seoul that in light of South Korea's solid economic fundamentals, any effect of the stimulus cut announced by the Federal Open Market Committee (FOMC) will be limited.

His prediction comes after the Fed said it will stay on course by reducing monthly asset purchases to $65 billion, starting in February, citing a strengthening of the economy, with gains being made in such areas as household spending and business investment. The move remains consistent with the FOMC's decision reached in December to reduce asset buying from $85 billion to $75 billion in January. It had said further cuts are planned for 2014 if conditions improve.

"Any volatility in the global financial and foreign exchange markets linked to tapering had been taken into account before the Fed's latest announcement," he said. Hyun pointed out that overall, South Korea's economic indicators have remained stable compared to some other markets.

The policymaker, however, said that because of problems in some countries such as Argentina and Turkey there is a risk that tapering may cause chronic market uncertainties leading to more volatility.

He said they may be a need to check the flow of global liquidity.

"For sudden, short-term market fluctuations that may occur, the government will follow contingency plans it set ahead of time and aggressively take all necessary measures," he emphasized.  

The minister then said that Seoul plans to incorporate changes that could occur in its three year economic reform plan, that include taking steps to prevent any fallout from burdening ordinary citizens.

This view was shared by others in the government who said the FOMC's move had been anticipated for some time, and, since it has largely been reflected in the market, should not pose new challenges for the economy.

Seoul expects Asia's fourth largest economy to expand 3.8 percent in 2014, up from 2.8 percent last year.

An official source, however, made clear the government is carefully monitoring the market as a whole.

"The cutting back of economic stimulus comes at a time when some emerging markets are facing uncertainties that may spread to other economies, and even in large mature markets that requires close observation," the official, who declined to be identified, stressed. He said due to such risks, Seoul is keen to maintain its current emergency monitoring regime.

In regards to any impact the latest tapering will have on South Korea's financial market, Financial Services Commission (FSC) Vice Chairman Jeong Chan-woo also said at another early morning meeting of senior financial policymakers that the country is well insulated from any fallout.

He pointed out the country maintains sizable foreign reserves, has a sound fiscal policy and a healthy current account surplus.

"Judging by such conditions any fallouts on the local market will be very limited, although there may be a need to keep close tabs on market volatility," the official claimed. He added that the Fed's move could even have beneficial effects by allowing South Korea to differentiate itself from more exposed emerging markets.

Some market watchers have speculated in the past that the sound South Korean economy could attract more investors wary of some emerging economies.

Jeong added that reducing the stimulus is another sign that the US economy is on the mend.

Despite his confidence, the official said the financial regulator will maintain its guard and work with related agencies to implement any emergency actions if the need arises. There have been concerns that the Fed's move could affect interest rates in the country, negatively impacting people who have taken out loans.

The US Fed had engaged in its third quantitative easing program in September 2012 to supply more liquidity into the market. The expansive monetary policy aimed to create more jobs and breathe new life into the economy that had not recovered from the financial crisis that started in late 2008.

South Korea's business sector said it also does not foresee any impact on South Korea, although it cautioned against the vulnerability of some emerging markets.

"Emerging markets can be hurt, yet there is little concern that the South Korean domestic economy and exports will be affected in any serious manner," said Byun Yang-gyu, an analyst at the Korea Economic Research Institute.

This view was repeated by executives at major companies such as Hyundai Motor Co.

"Overall the measure had been forecasted and while there may be some decrease in demand for new cars, it will not affect the market in any big way," a corporate source said.

The US car market is expected to grow 3.2 percent this year.

The electronics and petrochemical sectors said they will examine market developments, but did not see any real change in exports or the local economy, especially with interests rates being so low at the moment. The energy industry, which is sensitive to currency fluctuations, said it is taking steps to reduce exposure, yet predicted that shipments of petroleum products may actually go up, at least in the short run.

Local builders, on the other hand, said that the fallout from the tapering could hurt new orders in some Southeast Asian and Latin American markets where the value of local currency may suffer further depreciation.

On the domestic front, they added that higher interest rates as a result of less money reaching the global market could hurt local demand for new homes.