Choi Sung-jin
If the U.S. interest rate hike becomes reality, that would pose a serious dilemma for the Korean economy, an expert said Friday.
Professor Lee Sang-bin of Hanyang University made these and other points in a recent paper published in an in-house bulletin of the Korea Federation of Banks. "The upcoming U.S. interest rate hike will be the biggest concern that affects the Korean economy," he wrote.
Lee took note of the fact that all three recent U.S. interest rate hikes, made in 1994, 1999 and 2004, thrashed international financial markets, resulting in massive capital outflows from emerging economies such as Korea.
"Currently, monetary policies of major countries are showing a phenomenon of great divergence as the United States is weighing the timing for its rate hike while Japan and some European countries are maintaining negative interest rates," Professor Lee said. "Under these circumstances, Japanese and European funds flow into emerging countries while U.S. funds flow out of them."
When the capital inflows and outflows occur simultaneously, it will lead to greater fluctuations in the movement of foreign exchange rates, he noted, adding that the expansion of exchange rate volatility makes it difficult to forecast exchange rates, leading to an increase in hedging costs. "That in turn will further reduce the already shrunken global trade volume," Lee added.
Particularly, the U.S. interest rate hike, if and when it materializes, will exert considerable influence on Korea's currency, debt and stock markets.
"This past June when word spread about the scheduled raise of the U.S. interest rate, the Korean currency fell to as low as 1,230 won per dollar prior to the meeting of the U.S. Federal Reserve," Lee recalled. "If a similar situation recurs, foreign investors will sell off Korean stocks and bonds and change them into dollars to avoid foreign exchange losses, pulling down the Korean currency to sharply lower levels which will result in stock and bond markets crashing here."
Lee said the rise in the U.S. benchmark interest rate poses a serious dilemma for Korean policymakers. Considering the present economic situation, the Seoul government has to lower the interest rate but it also ought to raise it to avoid massive capital outflows, he added.
"To dissolve this dilemma, the government should tackle the economic slump with fiscal policy and regulatory reform instead of monetary policy while trying to expand currency swaps with the United States to prevent capital outflows," the Hanyang University professor said. "The government stresses it has abundant foreign reserves of $360 billion, but the experience of 2008, when Korea had reserves of $250 billion, shows that it could do little to head off the looming crisis."
If the U.S. interest rate hike becomes reality, that would pose a serious dilemma for the Korean economy, an expert said Friday.
Professor Lee Sang-bin of Hanyang University made these and other points in a recent paper published in an in-house bulletin of the Korea Federation of Banks. "The upcoming U.S. interest rate hike will be the biggest concern that affects the Korean economy," he wrote.
Lee took note of the fact that all three recent U.S. interest rate hikes, made in 1994, 1999 and 2004, thrashed international financial markets, resulting in massive capital outflows from emerging economies such as Korea.
"Currently, monetary policies of major countries are showing a phenomenon of great divergence as the United States is weighing the timing for its rate hike while Japan and some European countries are maintaining negative interest rates," Professor Lee said. "Under these circumstances, Japanese and European funds flow into emerging countries while U.S. funds flow out of them."
When the capital inflows and outflows occur simultaneously, it will lead to greater fluctuations in the movement of foreign exchange rates, he noted, adding that the expansion of exchange rate volatility makes it difficult to forecast exchange rates, leading to an increase in hedging costs. "That in turn will further reduce the already shrunken global trade volume," Lee added.
Particularly, the U.S. interest rate hike, if and when it materializes, will exert considerable influence on Korea's currency, debt and stock markets.
"This past June when word spread about the scheduled raise of the U.S. interest rate, the Korean currency fell to as low as 1,230 won per dollar prior to the meeting of the U.S. Federal Reserve," Lee recalled. "If a similar situation recurs, foreign investors will sell off Korean stocks and bonds and change them into dollars to avoid foreign exchange losses, pulling down the Korean currency to sharply lower levels which will result in stock and bond markets crashing here."
Lee said the rise in the U.S. benchmark interest rate poses a serious dilemma for Korean policymakers. Considering the present economic situation, the Seoul government has to lower the interest rate but it also ought to raise it to avoid massive capital outflows, he added.
"To dissolve this dilemma, the government should tackle the economic slump with fiscal policy and regulatory reform instead of monetary policy while trying to expand currency swaps with the United States to prevent capital outflows," the Hanyang University professor said. "The government stresses it has abundant foreign reserves of $360 billion, but the experience of 2008, when Korea had reserves of $250 billion, shows that it could do little to head off the looming crisis."
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