Korea, no longer emerging market

Capital flight unlikely following US rate hike

By Kim Jae-kyoung

SINGAPORE ― Korea is no longer regarded as an emerging market among global investors and economists, meaning it will not suffer any massive capital flight in the face of an imminent U.S. rate hike and other external shocks, analysts say.

They said Korea is different from other emerging markets that might see a sudden capital flight due to growing market uncertainties with the U.S. and Europe going in different monetary policy directions amid China’s slowdown.

This is a major shift in the global players’ view of Asia’s fourth-largest economy, and a U.S. rate hike will be a watershed for Korea to see whether it is really acknowledged as an advanced economy among investors.

“Investors are likely to differentiate between emerging markets over the coming years much more than in the past, with those having robust fundamentals, like Korea, benefitting from capital inflows,” Frederic Neumann, co-head of Asian economics research at HSBC, told The Korea Times.

“In addition, Korea should no longer be regarded as a classic emerging market. Korea has a sophisticated economy and mature financial markets. This, too, will contribute to a differentiation of Korea in the coming years.”

Indicators showing Korea graduated from emerging market status abound, analysts said.

One important measurement is the premium on credit default swaps (CDS), which is used to insure against a default. It is a contract that gauges a government’s ability to repay its debt. The higher the CDS premium, the higher the risk of sovereign debt.

According to the Korea Center for International Finance (KCIF), Korea’s CDS premium was 53 basis points (bps) on Nov. 27, down from 2013’s high of 103 bps. A basis point is 0.01 of a percentage point.

In comparison, premiums on the CDS of some emerging markets ― India, Turkey, Indonesia and Brazil ― recorded 146 bps, 268, 221 and 425, respectively, compared with 375, 253, 280 and 215 in 2013.

The Korean won also has shown less volatility, with its value gaining 0.11 percent against the U.S. dollar on Nov. 27 from a week ago. During the same period, India, Turkey, Indonesia and Brazil saw their currencies drop by 0.84 percent, 3.29 percent, 1.29 percent and 3.66 percent, respectively.

“Korea’s currency and asset markets have become far less volatile than in the past and less sensitive to developments elsewhere in the emerging market universe,” Neumann said.

There are several factors that have changed foreign investors’ views _ a large current account surplus, ample foreign exchange reserves and effective management of short-term debts.

‘New safe haven’

Citing these factors, Morgan Stanley Research Executive Director Sharon Lam even calls Korea a “new safe haven.”

“We have been arguing that Korea’s fundamentals have become much more solid in the last two decades,” she said. “The country’s economy seems to be taking another step forward to be considered a new safe haven.

“The liquidity, currency and interest rate concerns may return to challenge emerging market economies, but we expect Korea to remain resilient. Whether compared with its own history or that of other Asian countries, except for Japan, Korea now stands out as a safe haven for investors, especially amid global macro uncertainty.”

Some investors believe Korea may capitalize on a U.S. rate hike as they consider pulling their money out of emerging markets and investing it in Korea.

“I have seen a notable change in global investors’ attitude toward the Korean market,” Yu Sung-hun, head of the IR team at Shinhan Financial Group, said. “They are now looking at Korea a little differently than in the past.

“I recently met a group of foreign investors during a global investors’ conference in Singapore. Some of them expressed their intention to put more money into Korea if the U.S. starts liftoff. They look quite optimistic about the Korean market.”

But HSBC’s Neumann said Korea will not directly benefit from outflows from other emerging markets.

”I would see Korea receiving inflows in its own right as a much more mature economy, less and less subject to sentiment towards emerging markets more generally,” he said.

Mauro Guillen, director at the Wharton School of the University of Pennsylvania, also said: “South Korea will definitely be spared the worst consequences of a hike in U.S. interest rates, something that countries like Brazil, Mexico or Indonesia and Thailand will not.”

He said the best line of defense is the large current account surplus.

“In addition, there are interesting value propositions for the Seoul stock market,” he said.