By Choi Kyong-ae
The looming financial crisis in emerging countries, such as Turkey and Argentina, will have limited impact on Korea’s capital and stock markets, government officials and economic experts said Sunday.
They said Korea is not as vulnerable to currency swings and other external risks as it was in the late 1990s due to three factors _ its solid economic fundamentals, increased foreign exchange reserves and trade surpluses.
“Korea has restructured itself since the 1997 financial crisis to allow large conglomerates and integrated financial institutions to underpin the national economy,” Lee Phil-sang, a visiting professor of the economics department of Seoul National University, told The Korea Times by telephone, Sunday.
Korean conglomerates’ debt-to-equity ratio now stands at about 100 percent, sharply down from over 500 percent during the crisis. Moreover, the country’s foreign exchange reserves ran only tens of billions of dollars back then, after which they continued to rise to $346.5 billion at the end of December, Lee said.
Foreign reserves fell to as low as $20 billion in late 1997 when the country went to the International Monetary Fund for an international bailout worth $19.5 billion.
“The most urgent thing the government should do is to calm down the investor sentiment to keep investors from withdrawing their money from banks and markets or piling up dollars as safe assets,” he said, adding that government-led smoothing operations to stabilize the currency markets are also necessary.
Lee’s view was echoed by Young Soo-gil, a visiting professor of the KDI School of Public Policy and Management.
Young said drastic capital outflows from emerging countries with weak fundamentals are taking place due to a shift in U.S. monetary policy. “Korea does not belong to the group of weak economies because it has built up foreign-exchange reserves and continued to ink current-account surpluses for 23 consecutive months ended in December.”
Their responses come as the Ministry of Strategy and Finance held an emergency meeting of finance officials on Sunday morning in Seoul to discuss ongoing selloffs of local currencies in emerging markets and ways to remain less exposed to volatile financial markets.
“The emerging-market slide, triggered by the Federal Reserve’s move to further scale back its bond-buying program, is not likely to have any big impact on the Korean economy. But it is not a situation where we’re just looking at a fire across the river,” Vice Finance Minister Choo Kyung-ho said during the meeting, according to a statement released by the ministry Sunday.
To minimize any possible repercussions arising from the slide on the Korean market, Choo said, “We are keeping a watchful eye on any further developments in emerging economies.”
The government is closely watching for a possible “spill-over” of uncertainties in emerging markets such as Turkey and Argentina into other developing countries, the statement said.
“Amid concerns that the ongoing volatility in several developing countries may spread across the emerging world, the Fed’s approach will cut demand for emerging-market assets that have been boosted by the Fed tapering,” it said.
The Fed reduction, seen as a precursor to higher U.S. interest rates, would urge capital around the globe to flee those developing economies in search of higher returns back in the U.S. It would make weaker emerging economies struggle with a massive cash outflow, according to the statement.
With the Fed expected to reduce its bond-buying plans again next week, Choo said the value of currencies in Argentina and Turkey may fall further and concerns of a slowdown in China is also growing.
The vice minister said, “The government will make an extra effort to keep a clean bill of health for the economy on top of a thorough monitoring on external risk factors.”
Continued worries about the withdrawal of U.S. monetary stimulus have something to do with the meltdown in the Turkish lira and the plummeting Argentine peso, coupled with local political unrest in both countries, the professors said.