By Yoon Ja-young
Staff Reporter
The financial malaise triggered by Dubai’s request for a moratorium is expected to have limited effect on the local economy, when considering the country’s limited exposure to the Middle East, according to policymakers and analysts.
They, however, pointed out that it could indirectly weigh on the local financial market as the global funds invested in Dubai may sell off Korean assets in a liquidity crunch.
The Financial Services Commission and the Financial Supervisory Service held up an emergency meeting, Sunday, concerning how the local financial market would be affected by the troubled Dubai.
“The financial markets, both local and global, are increasingly fluctuating since Dubai World’s request for a moratorium, but it isn’t likely to develop into a global system risk as it did with the collapse of Lehman Brothers,” the regulator said after the meeting.
The positive views are based on the determination that it isn’t serious enough to agitate the global market. “When considering the economic power of Abu Dhabi, which holds over $1 trillion assets overseas, the short-term debt of Dubai, standing at around $10 billion, is small,” said Lee Kwang-soo, an analyst at Tong Yang Securities.
Korea’s slight exposure to Dubai backs up the positive view. According to the regulator, Korean financial businesses’ exposure to United Arab Emirates stands at $221 million, and that to Dubai a mere $88 million.“The exposure to UAE, including Dubai, accounts for a mere 0.4 percent of the $52.8 billion overseas exposure by local financial businesses,” the regulator said.
The Middle East fund takes only 0.3 percent of Korean banks’ overseas borrowings.
However, the regulator said it was closely monitoring the possibility of the Dubai shock developing into global turmoil.
The problem lies in that Korean financial market tends to react much more sensitively to global shocks compared with other markets.
The record high capital inflow to local financial markets could trigger another risk.
According to the Bank of Korea, the capital account saw $24.9 billion inflow this year as of October, which contrasts with a $33.9 billion outflow last year. It is the biggest inflow since 1980 when the central bank started compiling such data.
Foreigners bought near 30 trillion won worth of shares in the main bourse this year, and over 48 trillion won in bonds, a record high and more than twice of what they bought last year.
The purchasing was based on dollar carry trade, borrowing low-interest rate dollars to seek higher investment returns in other countries.
For a small, open economy like Korea, however, these funds could spell trouble. When the foreign funds start an exodus from the local capital market as they did last year after the collapse of Lehman Brothers, it could shock the market once again. Those that invested in Dubai could pull out of the Korean market.
“The ratio of foreigners in the financial market is high here, and there are local institutional investors such as pension funds to sustain the market. As we already witnessed around the end of the last year, Korea is a good option for global investors when they want to convert the investment into cash amid financial market trouble,” said Jeong Yong-taek, an economist at KTB Securities.
Foreigners dumped 5.5 trillion won worth of bonds in the local market from October to December last year, agitating the market. There are already signs of the foreigners dumping shares here, with foreigners selling over 200 billion won shares last Friday to pull down the index by 4.69 percent. The Korean won lost 20.2 won against dollar in that single day.
At the global level, there are also rumors of Eastern European countries following Dubai. According to SK Securities, the biggest risk is seen as the Ukraine, where the credit default swap (CDS) premium stood at the world’s highest level of 1,446 basis points. As the European banks that have high exposure to Dubai cut down on loans, countries in Eastern Europe, which resort to overseas debt, could face trouble.
The Japanese economy, suffering from deflation and the strong yen, is another threat to the global economy. The yen gained the highest level against the dollar in 14 years, threatening Japanese exporters and the job market. Consumption is not recovering either.
A strong yen is not always helpful for Korean exporters, as Korean manufacturers resort to capital goods from Japan. Korea’s exports to Japan aren’t likely to gain from a strong yen as well as the economy suffering from deflation.