By Kim Tong-hyung
The deepening woes in the eurozone due to the debt crisis sent a shudder through Korea’s financial market, driving the nation’s benchmark index to a near yearly low Monday.
After losing 10 percent of its value in a one-month span, the Korea Composite Stock Price Index (KOSPI) closed at 1,783 points, down 2.8 percent from last week’s close. The index smashed below its annual low of 1,779.47 at one point during trading.
The local currency finished at 1,181.95 won to the greenback, down 4.3 won from Friday's close.
Foreign investors continued to sell, facing triple fears of a toxic Europe, faltering recovery in the U.S., and a softening Chinese economy, and this is reflected in the sliding value of the local currency as well.
Korea needed the escalation of the European turmoil like a hole in the head. The outlook for the country’s economy is bleak with a blizzard of bad data sweeping the figures for exports, employment, production and retail sales. The indicators are bad enough to prompt officials to wonder whether the ``perfect storm’’ has come ashore.
Kim Seok-dong, the Financial Services Commission (FSC) chairman who is rarely a source of apocalyptic comments about the Korean economy and global conditions, stressed that all possible preparations should be made as 2012 may prove to be something worse than just a new 2008.
Korea’s heavy dependence on exports, which account for half of its economy, and the openness of its capital markets make it particularly vulnerable to rough patches in the global economy.
``The current European fiscal troubles will hit the world economy with a force not seen since 1929,’’ Kim said an in a meeting between senior financial regulators in Seoul.
``Europe has failed to nip the Greek troubles in the bud and now the crisis has spread and took hold in Spain. Span’s economy is five times larger than Greece’s, so a crisis there could impact the world economy and financial markets with a severity beyond imagination. We need to keep a close eye on the threats posed to Spanish banks and renew our sense of urgency in preparing for the possibility that things could turn out to be worse than feared.’’
Foreign capital flight accelerated as well. Offshore investors pulled out of the market for the third straight session, dumping 264 billion won (about $223 million) worth of shares, indicating the erosion of confidence in the Korean economy. Foreigners had unloaded Korean shares for 18 straight sessions before a buying spree reversed the trend on May 29, but the rebound failed to last two days.
Recent data from the Financial Supervisory Service (FSS), the executive unit of the FSC, shows that foreign investors sold more than 3.4 trillion won worth of stocks in May alone, with European investors responsible for nearly 90 percent of the net outflow.
Analysts say that the heady mix of negatives facing the economy from inside and out suggests things will get worse for Korea before it gets better.
Korean exports managed a 3 percent annual increase in the three months through March, dramatically off its pace of a 29.6 percent year-on-year rise during the first quarter of last year and a 35.8 percent jump from the same period in 2010.
The sharp pullback in trade surplus has been coupled with softened consumer spending as families struggle to cope with deteriorating finances and higher costs of living.
Korea’s historically-high household debt, at near 1 quadrillion won, matches an entire year’s GDP, while an alarmingly large portion of working-age Koreans remain sidelined from the labor market.