Effects on Korea
The United States stopped its quantitative easing policy, and market participants are paying keen attention to its potential impact on the Korean economy. Experts’ consensus is that money will flow to the U.S. due to the decreasing interest rate difference amid deteriorating economic fundamentals. The real economy is expected to be affected as well, with the Korean economy now less dependent on the U.S. economy and Korea’s domestic demand remaining relatively low.
“Recently, the 10-year treasury bond rates of Korea and the U.S. are moving in the same direction,” said LG Economic Research Institute analyst Jung Sung-tae, adding, “If the interest rate goes up in the U.S. and the foreign exchange rate rises, foreign investors do not have any reason to hold Korean government bonds.” He continued, “Although foreign central banks are holding the bonds, it is highly likely that they refuse to repurchase the maturing portions while opting instead to invest in advanced economies.” At present, Templeton Asset Management owns 30 percent of the bonds. If it withdraws, volatility will surge, to increase risk.
Financial instability in emerging markets could spread to Korea, too. The international financial market already fluctuated last year, when the Fed implied tapering and the possibility of a financial crisis hiked in some emerging countries. The Bank of Korea is well aware of this point as well. “Korea could take a more serious hit from fluctuations in emerging markets with lower foreign exchange soundness than from the interest rate hike in the U.S.,” it recently said.
Concerns are also rising over the real economy. Although the termination of quantitative easing means a recovery of the U.S. economy, it is expected to be less helpful, since the economic reliance between the two countries is lower than before. In 2007, the U.S. accounted for 12.3 percent of Korea’s total exports, but the percentage dropped to 11.1 percent last year.
Rather, the slowdown of the Chinese and European economies is forecast to deliver a staggering blow to the real economy. China represented 26.1 percent of Korea’s exports in 2013, four percentage points higher when compared to 2007, and the E.U. took up 15 percent of the exports last year.
“The hawks raised their voice at the most recent Federal Open Market Committee meeting, and now the possibility of interest rate rise in the first half of 2015 has gone up,” BS Investment & Securities researcher Park Sang-kyu explained, continuing, “In that case, the market could show fluctuations at the end of this year and the beginning of next year, given that the financial market has reflected past U.S. key rate changes about six months ahead.” Hyundai Research Institute analyst Lee Jun-hyup added, “If the interest rate hike is in a gradual progress, the blow to emerging markets would be limited and no chaos will take place in the Korean economy.”