By Kim Jae-kyoung
Staff Reporter
Korean policymakers are concerned over the potential fallout from a series of unfavorable economic developments ― such as the Dubai debt crisis ― as such unexpected events are feeding uncertainties in the domestic financial market.
Top financial regulators convened an emergency meeting Sunday to gauge the fallout from the Dubai situation and come up with measures to reduce uncertainties created by renewed concerns over the financial environment.
Although the Dubai shock is expected to have a limited impact on the local economy and market, chances are thatcombined with other economic woes, such as deflation in Japan and faltering East European economies, it could turn into a trigger for sudden capital flight.
"The Dubai shock is fallout from the global financial crisis. I don't rule out the possibility that it will send a ripple effect through other countries," Hyundai Research Institute senior economist Yoo Byeong-gyu said.
"If this incident affects financial firms in the U.S. and Europe, it will send a shudder through the global financial market, which will, in turn, destabilize the local market," he added. "Things could turn worse if exit strategies are implemented in this situation."
Recently, Japan warned that it had slipped back into deflation, dampening global investor sentiment. In addition, the Dubai fiasco is raising questions about the financial health of debt-ridden East European economies, some of which ― many believe ― are about to fall off the edge of a cliff.
Amid such lingering uncertainties in the global economy, the domestic financial market has shown signs of heading downward again.
The benchmark KOSPI tumbled 75.02 points, or 4.7 percent, Friday to 1,524.50, marking the largest decline since Nov. 6, 2008, when the index fell 89.28 points. The local currency closed at 1,175.5 won against the greenback, down 20.2 won, and the first time it has closed above 1,170 since Nov. 5.
The local equity market has lost more than 10 percent over the past two months, due to sluggish trading. Daily turnover stood at 277.85 million shares in November, down 90 million from the previous month, and the lowest since 239.3 million shares changed hands in August last year
The massive capital inflow over the past several months has added to market uncertainties. Korea posted a net inflow of $24.9 billion in its capital account, which tracks cross-border money flow not involving commodities, between January and October, thanks to surging foreign investments in stocks and bonds here.
The figure, the largest net inflow since the central bank began compiling relevant data in 1980, is compared to a net outflow of $33.96 billion during the same period last year. The previous record was $19.1 billion in 1996.
Policymakers are worried about a massive inflow of hot money into the domestic market as it could cause a market panic once foreign investors pull out their money en masse.
The key culprit behind the capital influx is the "carry trade." Record low interest rates in the United States and Europe have sparked a surge of capital into hot emerging markets as investors chase higher yields.
Analysts said that Korea should beef up monitoring of traders and take a range of policy measures to prevent an excessive flow of hot money and to stabilize the financial market.
"There are fears about an abrupt end to the dollar carry trade, which has been the main driver behind the bullish financial market," a BOK economist said. Carry trade refers to the investment strategy of borrowing money in countries with low interest rates and investing in high-yield currencies and assets elsewhere
"Once the U.S. starts an exit strategy, it will discourage the dollar carry trade, resulting in a sudden fall in asset prices in emerging markets. If that happens, the country is likely to face a liquidity crunch again and a subsequent collapse of the won," he added.
On top of external woes, the local financial sector's weakness has added to market uncertainties.
According to the Korea Development Institute (KDI), the financial market has regained stability on the back of credit-easing monetary policies but the economy is facing the side effects of such policies, as rising short-term liquid assets create a new asset bubble.
In addition, the state-run think tank said that since Korea was higher than other advanced countries in debt-to-GDP ratio for individuals, it was probable that banks' profitability and financial soundness would turn worse rapidly if there were a sudden increase in bankruptcies.
kjk@koreatimes.co.kr
|
무디스, 스페인·伊·포르투갈 신용등급 강등
