Floating capital rises to record high

By Yoon Ja-young

The country’s short-term “floating” capital soared to a record high as investors lack confidence in current economic conditions despite a historically low interest rate.

According to the data from the Bank of Korea (BOK) and Korea Financial Investment Association (KOFIA), the country had more than 959 trillion won in short-term floating capital in markets as of May. That is 15.1 trillion won more from a month ago and the highest level ever.

The figure includes cash, demand deposits, money-market deposits, money-market funds, certificates of deposit (CDs), cash management accounts (CMAs), repurchase agreements (RPs), customer deposit funds at brokerages and savings with less than six-month maturities at banks.

Cash accounted for 80.1 trillion won of the short-term floating capital, while demand deposits totaled 188.6 trillion won. Money market funds stood at 70 trillion won and CDs 20.2 trillion won, while 44.4 trillion won is in CMAs. RPs had 10.2 trillion won.

Short-term floating capital has been continually increasing, from 539.3 trillion won in 2008 to 794.8 trillion won in 2014. It has been increasing especially steeply recently, marking a 17.2 percent increase last year.

This reflects the fact that investors don’t know where to commit amid economic uncertainties. Analysts also show concern over a liquidity trap where corporate investment and housing consumption fail to increase despite abundant liquidity in the market. The central bank slashed the key rate to a historically low 1.25 percent, but it isn’t helping pick up the economy.

LG Economic Research Institute said in a report that facility investment will continue negative growth due to falling profitability of exporters.

“Domestic demand, which is currently leading the economy, will also lose vitality. The rise in real income based on low oil prices will slow down and consumer sentiment may deteriorate based on growing volatility in the financial market,” it noted. The institute expects the economy to grow 2.5 percent this year as the growth rate falls to near 2 percent in the latter half of the year.

While the government is planning a 10 trillion won supplementary budget to minimize the negative effect of corporate restructuring and boost consumption and construction investment, the effect is likely to be limited, according to the think tank.

While the Bank of Korea is facing pressure to further slash the key rate, there is some doubt over its effectiveness, as the key rate cut isn’t helping boosting the economy as it did in the past.

Analysts also point out that the supplementary budget isn’t a fundamental solution. A survey on businesses by Hyundai Research Institute showed that more than half of businesses believe that a supplementary budget and other fiscal measures will only have a small impact on consumption.

“Due to external and internal uncertainties, the corporate investment sentiment is contracting. There should be more aggressive efforts to improve the landscape for corporate investment such as stronger incentives,” said Lim Hee-jung, a researcher at Hyundai Research Institute, citing deregulation and tax support as key means for improvement.