By Yoon Ja-young
The nation’s economy is exposed to greater external risks involving a stronger dollar and weakening of emerging market currencies, coupled with falling international oil prices, analysts said Wednesday.
“The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on the global economy. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions,” the Bank for International Settlements (BIS) said in its latest report.
With the United Sates being the only major economy recovering since the global financial crisis, the dollar has been turning strong.
Falling international oil prices are also leading to a preference for the dollar, making the currency gain more value as well as boosting the U.S. economy itself. International Monetary Fund chief Christine Lagarde said early this month that lower energy prices will help the U.S. economy grow 3.5 percent next year, which compares with the October forecast of 3.1 percent. U.S. consumers have more room for spending thanks to lower oil prices. Brent oil fell by 40 percent from early this year, reaching the lowest level in five years.
The falling oil prices, meanwhile, are hitting emerging economies, especially those exporting oil and other natural resources.
In the case of Venezuela, oil products account for 95 percent of its exports. The falling oil price directly affects the country’s fiscal soundness. Credit Suisse said in a report that the oil price should be maintained at $97 per barrel for the country to meet obligations of $138 billion in foreign-currency debt payments due from 2015 through 2038.
As emerging economies have much of the debt in dollars, a strong dollar and weak local currency means the debt burden will be bigger. Such concern has triggered the Russian ruble to lose around 40 percent in value this year, and Brazilian real also fell to the lowest level since 2005
Analysts expect the super dollar and low oil prices to continue, with the sluggish Japanese and EU economies, as well as an interest rate hike by the United States to come. Morgan Stanley said oil prices could fall as low as $43 a barrel next year.
“Oil took near 40 percent of global energy in 1990, but it is expected to fall to 32 percent next year thanks to natural gas and other alternative energies. The competition between oil producing countries, meanwhile, is getting fiercer, with an increase in oil production in the United States,” said So Jae-yong, an analyst at Hana Daetoo Investment and Securities.
Analysts generally say that Korea won’t be directly affected by the emerging market risks, citing its huge foreign exchange reserves amounting to $360 billion.
However, analysts point out that Korea’s capital market has high volatility in terms of capital flows.
“In terms of capital inflow and outflow, Korea is much more volatile than other Asian emerging economies, not to mention developed economies,” said Park Hae-shik, a research fellow at the Korea Institute of Finance.
He said the coefficient of variation, measuring the ratio of net capital inflow compared with GDP, stood at 6.24 for Korea before the global financial crisis, while the figure stood at 1.27 for developed economies and 2.35 for Asian emerging economies. It means Korea sees massive inflow and outflow of capital.
He estimated the coefficient to have risen further after the financial crisis, to 10.34.
“Even if the United States makes a minor key rate hike, the outflow of capital in Korea can be huge,” he said.
Analysts also warn that Korea’s exports could be hurt as emerging markets take around 50 percent of its total exports.