Seoul Bourse Sees Biggest Foreign Fund Outflow in Asia
By Yoon Ja-young
Staff Reporter
The Seoul bourse has seen the biggest exodus of foreign funds among major emerging Asian markets since the U.S. subprime mortgage woes, according to a report Sunday.
The Korea Institute of Finance said foreign investors sold off $32.3 billion worth of shares from the Korean stock market between August last year ― when the subprime mortgage problem emerged ― and February this year.
Meanwhile, the exodus was not that severe in other major emerging markets in Asia. Foreign investors sold only $3.2 billion worth of stocks in Taiwan, $2.5 billion in Thailand and $800 million in the Philippines. They recorded $4.2 billion in net buying in India, and $1.9 billion in Indonesia.
The selling dates back to the pre-subprime mortgage crisis. Foreign investors sold $11.8 billion worth of Korean stocks in 2006 and $26.7 billion in 2007. The sell-off for this year recorded $11.3 billion as of February. Consequently, foreign investors' stake in the Korean stock market, which once hovered above 40 percent, fell to around 30 percent.
The economic think tank said foreign investors are selling shares due to the falling investment return on stocks and rising risk regarding credit ratings. The government should actively manage foreign debt to soothe the sovereign rating concern, it advised. Korea's net foreign credit plunged to $34.8 billion last year, down $71.8 billion from a year ago.
The report warned of the probability of an additional hike of the won-dollar exchange rate. The Korean won has been uniquely weak against the globally weak dollar due to the sell-off of Korean stocks and the new government's implication that it prefers a weak won to boost exports. The weak won, however, adds burden to the economy, which is already suffering from inflationary pressure.
``Once liquidity gets worse with the aggravating U.S. subprime mortgage problem, foreign investors will try to raise liquidity from the Korean stock market which is relatively easy to capitalize,'' said Lee Yoon-sok, a research fellow at the institute. He said it would lead to further weakening of the won against the greenback.
Foreign investors, meanwhile, are increasing buying of public bonds. They bought 4.6 trillion won in public bonds this month as of March 26, raising the total to 41 trillion won, the largest ever and nine times that of December 2006.
They bought 3.5 trillion won worth of bonds in January, and 2.5 trillion won in February. Most of the buying is estimated to be done with hot money engaged in arbitrage following the interest rate gap between Korea and the United States.