Seoul stocks, won plunge on Brexit

By Yoon Ja-young

Korea’s stocks and currency plunged as investors panicked over the possible fallout of Britain’s surprise vote to exit from the EU, dealers said.

Analysts said growing uncertainties on global financial markets, triggered by the Brexit, will overshadow the sluggish Korean economy. They ruled out any immediate huge direct impact on the real economy, but said it will weaken overall investment and consumer sentiment.

The benchmark KOSPI closed down 3.09 percent at 1,925.24 points. The tech-loaded KOSDAQ market plunged 4.76 percent to 647.16.

The won tumbled, closing at 1,179.9 won against the dollar, losing 29.7 won from the previous day.

Analysts said the Seoul stock market will remain weak for the time being on growing uncertainties in global financial markets.

Kim Yong-goo, an analyst at Hana Financial Investment, said that though it would take more than two years for the United Kingdom to actually leave EU, there is no change in the fact that it will leave.

“The concern was reflected in the financial market as a shock. The issue now is whether it will stabilize or expand.”

Vice Finance Minister Choi Sang-mok said that the government will take all measures to stabilize the stock and foreign exchange markets.

“We will strengthen cooperation with related ministries to block financial uncertainties from spreading to real economies including exports,” Choi said at an emergency macroeconomic and financial meeting.

“The market had expected the U.K. to remain, but as it turned out that it will leave, there will be much chaos in the U.K. and in global financial markets.”

He said that the Korean government will strengthen cooperation with international financial bodies in China and Japan to stabilize the market. He said that the first general meeting of the Asian Infrastructure Investment Bank (AIIB) to be held in Beijing on June 25 will be an opportunity for stronger coordination with major economies. The vice minister also told reporters that currency swaps between regions are being discussed.

While some analysts estimate Brexit won’t have much real effect other than psychological shock, due to the fact that the exit process will take between two and seven years, many say that the years of process means continuing uncertainties in the global economy and financial markets.

They say it can trigger another global recession through a contagion effect, pushing other countries to desert the EU.

Lee Sang-jae, an economist at Eugene Investment, said Brexit will lead to financial uncertainties in vulnerable countries and currency wars.

“The contraction of the eurozone economy is inevitable when considering the negative shock on risky assets. Its contraction means a slowdown of the Chinese economy, which has huge trade with the region. It will then lead to recessions in emerging economies.”

He also pointed out that Greece’s default risk, which began in May 2010, continued for two years. It led to recession and fiscal and financial risks in the eurozone as well as quantitative easing in developed economies. “The Brexit issue will continue plaguing economic and financial markets for two to seven years. Of course, the shock will decrease as time goes on, but global financial markets will face frequent shocks.”

Analysts say it will have significant negative impact on Korea in the long term as well.

“The pound lost around 10 percent. The euro will weaken and the dollar will strengthen. The Korean won will dip in value,” Kim said.

“This could be good for exports in terms of price competitiveness, but it also reflects that the global economy and the financial market face tough conditions. Brexit means serious trouble to trade within the eurozone, and the worsening trade conditions in developed markets are of course bad for Korea.”

Oh Jung-geun, a professor at Konkuk University, showed concern over the exodus of funds. “In financial markets, the U.K. investment in Korea amounts to $30 billion. With the weakening of the Korean currency, some of the funds may flow out of Korea seeking safety assets,” he said.