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Korea to be Hit Hardest among Asian Countries by Rising US Interest Rates
IMF Analysis
Korea to be Hit Hardest among Asian Countries by Rising US Interest Rates
  • By matthew
  • October 28, 2014, 06:32
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The International Monetary Fund (IMF) released an analysis that South Korea will receive the greatest impact among Asian countries after the sudden changes in US monetary policy.

According to the “2015 Asia-Pacific Economy Forecast” released on Oct. 27, if the U.S. economic growth rate drops and interest rate soars in the market as results of the earlier US interest rate rise, South Korean GDP will drop by 0.98 percent for a year from the start of the “shock.”

This means that the growth rate of South Korea would drop to 3 percent if the global financial market gets caught in the shock of the US interest rate rise next year. Currently, the Korean government and the Bank of Korea forecast that next year's Korean economic growth rate will be 40 percent and 3.9 percent each.

IMF reported these predictions at a joint conference with the Korea Institute for International Economic Policy (KIEP) held on Oct. 21.

Romain Duval, director of the Asia-Pacific Region Economy for the KIEP, explained, “Because the capital that flows into the South Korean market is vulnerable to changes from external shock, there could be capital outflow in the financial sector and slowdown of exports to the US in the real economy,” in an interview with Korean news agency.

Meanwhile, it was analyzed that Japan’s economic growth rate will drop by 0.86 percent, the five countries of ASEAN by 0.85 percent, and China by 0.79 percent. India was forecast to see the lowest drop of the growth rate of 0.15 percent, while South Korea would suffer the biggest fall of 0.98 percent.

Duval said, “It is forecast that the US Federal Reserve System will gradually raise interest rates in the market, however, it is quite possible that the shock will happen because of an unexpected monetary policy.”

When the Federal Reserve System hinted for the first time in May last year that a withdrawal of quantitative easing is possible, the U.S.'s long-term interest rate increased by 1 percent (100bp) in a short time. As a result, Emerging economies suffered capital outflow.

However, the IMF said that there won't be a big problem, since South Korea can afford to respond to it appropriately with financial and monetary policies.

Duval added, “In the case of capital outflow, South Korea should adopt a retrenchment policy, while letting the depreciation of the Korean currency go on.”