With an international exchange rate war in the offing, South Korea’s financial instability index is on the rise.
The Korea Institute for International Economic Policy (KIEP) said on May 28 that the nation’s financial instability index recorded 9.3 points in April this year, up 1.8 points from 7.5 at the end of December last year.
The institute developed the financial instability index on its own based on nine key indicators in each of the three segments of the financial market -- the fund brokerage market, foreign exchange market and stock market.
KIEP said that it analyzed the level of financial instability at home and abroad since the global financial crisis in 2008 and found that while South Korea’s overall financial stability improved compared to the past, its financial instability index has kept rising since last year.
One major reason for the index's upward move is the increased power of foreign investors in the domestic financial market, such as foreign exchange and stock markets. KIEP said that foreigners have expanded their influence on the South Korean stock and bond markets after the financial crisis. Especially, the Chinese financial market has emerged as a major determinant of South Korea’s financial instability. In addition, a higher benchmark interest rate in the United States adversely affected the South Korean financial market.
KIEP said that the government should take time in easing the measures introduced to stabilize the financial market, such as the levies imposed on banks’ short-term foreign currency-denominated borrowings, limits on futures exchange positions and taxes on foreigners’ bond investment.
KIEP also suggested that the government expand the current financial stability system as it is focused on banks and other private fund brokerage institutions.
Jeong Young-sik, head of the New Southern Economy division at KIEP, said, “Financial market instability can increase in the future depending on how the trade issue between the United States and China turns out.”