By Kim Yoo-chul
The federal deficit in the United States is highly likely to increase this fiscal year. Economists say that the annual amount will likely exceed $1 trillion in fiscal 2020 and thereafter. The US fiscal year ends in September every year.
The key question is what effect will it have on the Korean economy?
First and foremost, an increase of the U.S. fiscal deficit is seen to have a negative effect. The rise in infrastructure expenditure of the U.S. government will lead to higher interest rates.
Governments fund the fiscal deficit either through borrowing from the central bank or raising money from capital markets through the issuance of various bonds and treasury bills.
The yields of 10-year US treasury bonds rose to 2.88 percent because the country's wage growth hit a record in eight years and seven months.
Now, economists say the Federal Reserve Board will raise its key interest rate for a third time this year, adding there are possibilities that the Fed will make an additional rate hike, its fourth in the period.
Given the sizable amount of home loans and other debt owned by Korean households, the U.S. rate hike may dampen consumption due to the growing burden of repayment, economists say.
By the end of the third quarter of last year, the total household debt was 1,419 trillion won ($1.3 trillion).
The Bank of Korea (BOK) has consistently said the nation is expected to achieve a growth target of 3 percent this year while controlling inflation under its target range.
The Hyundai Economic Research Institute, a private think tank, expects an increase of a 1 percent benchmark rate would lead to a 3 percent increase in the lending rate from private banks.
Under that scenario, the average amount of interest a household should pay will increase by 4.7 million won compared to now. Yields of a treasury bond with a maturity of three years, considered as the benchmark, rose to 2.24 percent from 2.17 percent from Jan. 18 to Feb. 7.
"Just how much deficits affect the interest rate is still being debated. However, these U.S.-oriented factors could weigh on the domestic economy," said Ahn Young-jin, an economist at SK Securities.
Economists say while there are possibilities that more investors will be bracing for an increase in U.S. interest rates, it's less likely that international investors will heavily reduce their exposure in Asian markets including Korea.
"The latest agreement with Switzerland for a bilateral currency swap is also a positive sign as Korea has added a new buffer against any external financial turmoil," said Lee Jae-hyung, an analyst at Yuanta Securities in Seoul.
He added the agreement is likely to have a positive impact of preventing any capital outflow after Korea previously agreed with Canada for a currency swap deal in November last year.
But theoretically, a rise in U.S. interest rates means its economy, which is the world's largest, is on a solid growth track, opening room for Korean exporters to pursue continued growth.
Obviously, during a deficit, the U.S. dollar generally weakens and that trend is making large Korean exporters remain competitive in terms of product price.
"Samsung Electronics is reviewing lots of scenarios to expand our business in the U.S.," a Samsung Electronics executive said by telephone.
The company is the country's largest exporter, and has invested billions of dollars in the U.S. for its chip, home appliances and research and development facilities.
But company officials expressed concerns over increased threats posed by U.S. protectionism as the Trump administration is seeking trade concessions to reduce the U.S. trade deficit with Korea, which was $22.8 billion in 2017.
The federal deficit in the United States is highly likely to increase this fiscal year. Economists say that the annual amount will likely exceed $1 trillion in fiscal 2020 and thereafter. The US fiscal year ends in September every year.
The key question is what effect will it have on the Korean economy?
First and foremost, an increase of the U.S. fiscal deficit is seen to have a negative effect. The rise in infrastructure expenditure of the U.S. government will lead to higher interest rates.
Governments fund the fiscal deficit either through borrowing from the central bank or raising money from capital markets through the issuance of various bonds and treasury bills.
The yields of 10-year US treasury bonds rose to 2.88 percent because the country's wage growth hit a record in eight years and seven months.
Now, economists say the Federal Reserve Board will raise its key interest rate for a third time this year, adding there are possibilities that the Fed will make an additional rate hike, its fourth in the period.
Given the sizable amount of home loans and other debt owned by Korean households, the U.S. rate hike may dampen consumption due to the growing burden of repayment, economists say.
By the end of the third quarter of last year, the total household debt was 1,419 trillion won ($1.3 trillion).
The Bank of Korea (BOK) has consistently said the nation is expected to achieve a growth target of 3 percent this year while controlling inflation under its target range.
The Hyundai Economic Research Institute, a private think tank, expects an increase of a 1 percent benchmark rate would lead to a 3 percent increase in the lending rate from private banks.
Under that scenario, the average amount of interest a household should pay will increase by 4.7 million won compared to now. Yields of a treasury bond with a maturity of three years, considered as the benchmark, rose to 2.24 percent from 2.17 percent from Jan. 18 to Feb. 7.
"Just how much deficits affect the interest rate is still being debated. However, these U.S.-oriented factors could weigh on the domestic economy," said Ahn Young-jin, an economist at SK Securities.
Economists say while there are possibilities that more investors will be bracing for an increase in U.S. interest rates, it's less likely that international investors will heavily reduce their exposure in Asian markets including Korea.
"The latest agreement with Switzerland for a bilateral currency swap is also a positive sign as Korea has added a new buffer against any external financial turmoil," said Lee Jae-hyung, an analyst at Yuanta Securities in Seoul.
He added the agreement is likely to have a positive impact of preventing any capital outflow after Korea previously agreed with Canada for a currency swap deal in November last year.
But theoretically, a rise in U.S. interest rates means its economy, which is the world's largest, is on a solid growth track, opening room for Korean exporters to pursue continued growth.
Obviously, during a deficit, the U.S. dollar generally weakens and that trend is making large Korean exporters remain competitive in terms of product price.
"Samsung Electronics is reviewing lots of scenarios to expand our business in the U.S.," a Samsung Electronics executive said by telephone.
The company is the country's largest exporter, and has invested billions of dollars in the U.S. for its chip, home appliances and research and development facilities.
But company officials expressed concerns over increased threats posed by U.S. protectionism as the Trump administration is seeking trade concessions to reduce the U.S. trade deficit with Korea, which was $22.8 billion in 2017.
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