US interest hike may batter Korea Inc. hard

By Kim Tae-gyu

The Korean economy is likely to suffer from aftershocks of a possible U.S. interest rate hike which looms large as hinted by top Federal Reserve officials last week, experts said Sunday.

They said that another U.S. rate hike is feared to prompt the outflow of foreign capital from South Korea. The Seoul administration quickly responded by agreeing to resume bilateral talks on a currency swap with Japan.

“The biggest short-term concern may be the departure of overseas funds amid worries about foreign exchange losses and the resultant shocks on the Seoul bourse,” said Lee Sun-yup, an analyst at Shinhan Investment.

“If history is an indicator of future events, it would weigh on not only Korea but also the whole world. We witnessed how woes on the U.S. interest rate hit both local and global markets twice, midway through 2015 and early 2016.”

According to Bank of Korea (BOK) data, international investors pulled out up to 30 trillion won ($26.6 billion) from the country’s financial markets between June 2015 and February this year.

Last Friday, Fed Chair Janet Yellen told a gathering of central bankers that the case for raising rates had strengthened because the U.S. economy is nearing its goals of maximum employment and price stability.

She did not indicate when the Fed would act ― the Fed is scheduled to have three more policy meetings this year in September, November and December.

The consensus has been that the U.S. central bank would raise the rate by 25 basis points to between 0.5 percent and 0.75 percent in December but a growing number of observers move up the envisioned timeline to next month.

The Korea Center for International Finance came up with a report on Saturday with a similar opinion.

Even before the Fed chair’s comments, overseas investors turned to a selling mode simply due to concerns about a U.S. rate hike, resulting in the benchmark KOSPI slumping for three straight days through last Friday.

Seoul scrambles as its finance minister agreed Saturday to start discussions on a currency swap deal with its Japanese counterpart. A $10 billion swap pact between the two neighbors is currently in place but the safety net will expire in early 2017.

Asia’s fourth-largest economy would also beef up its push for the passage of an extra budget worth 11 trillion won, which has been pending due to political bickering between ruling and opposition camps.

However, such measures may not be enough.

“Our economic fundamentals are relatively strong. Hence, the short-term effects would be limited. But we should keep an eye on its ramifications over the long haul,” said Prof. Lee Phil-sang at Seoul National University.

“Long-term consequences like aggravated economic sentiments or a global downturn can threaten the real economy. Worse, we have a time bomb of ever-rising mortgage loans.”

The household debts, mostly apartment mortgages, topped 1,200 trillion won last year for the first time and are expected to continue to rise to reach 1,300 trillion won this year. Thus far, homeowners have managed to remain standing thanks to low interest rates. But many are anxious that they would be in trouble once the borrowing costs start to rise.

The situation poses big challenges to the BOK, which has gone all-out to help revitalize the sluggish economy primarily by slashing interest rates.

It reduced the benchmark rate to a record-low 1.25 percent in June and was widely expected to cut it one more time to 1 percent later this year. Yet, nothing seems to be sure by now.

“The BOK is in a dilemma,” said an analyst in Seoul who asked not to be named. “If it cuts the rate to boost the economy, it may end up generating a capital exodus. If the central bank elevates the rate to prevent capital outflow, it will be a burden to the economy and debt-ridden households.”

A sole consolation is that the unusually strong Korean currency would stabilize so that the country’s exporters would be able to regain their global price competitiveness.

The Korean won has appreciated over the past few months, causing the prices of made-in-Korea products to go up in overseas markets. This has spawned another headache for the export-driven economy of which outbound shipments have decreased for 19 months in a row.