South Korea has been facing a dilemma, alongside their Chinese counterpart, in their economic policy, including currency exchange rates.
The slowdown in Korea, with its 2015 economic growth staying at a three-year low of 2.6 percent should ordinarily prompt the Finance Ministry’s further stimulus measures this year. But the global situation may not easily allow the nation’s conventional policy of providing liquidity in the market.
The recent crash in the Shanghai Stock Exchange Composite Index is likely to deepen the concern of Korean policymakers. During the Tuesday session, the Chinese index dipped to its lowest point in more than a year.
The Chinese government is tolerating the weak renminbi against the major currencies, including the U.S. dollar, in a bid to boost exports. But its policy could speed up capital flight and the bear equity market is warning of the potential risks.
In Korea, in the same vein, foreigners net sold stocks for the 37th consecutive session since Dec. 2. It is the longest selling spree in history, surpassing their continuous dumping records during the 1997 Asian foreign exchange crisis.
It is a simple comparison of the number of trading sessions. In terms of KOSPI index level and foreigners combined equity disposal worth, it is inadequate to say that their recent net-selling is a critical capital outflow.
Foreigners shifted their position to a net-buyer on the local bourse in 38 trading sessions Thursday.
In addition, positive prediction is a normal consensus among local analysts, who cite Korea’s robust sovereign ratings and major business groups’ fundamentals are considered.
But the looming dilemma lies in the currency value. Foreign investors will be wary of the won’s further losing. If the value the won-denominated assets is projected to fall in the coming months, Korean stocks will be less attractive.
The assumption means that the Finance Ministry — and with the Bank of Korea – cannot sit idle based on a feasible scenario that the won will nosedive to a risky level. It has continued to lose ground against the greenback to hover around 1,200 won.
Sufficient liquidity via stimulus packages would have a favorable impact on the economy in terms of elevating the GDP growth. In contrast, cheaper currency that might depreciate beyond 1,250 won per dollar would lead to an aggressive exit of foreign funds.
The global market is paying close attention to the Washington-based Federal Reserve’s statements, which is to come this Thursday (Korea time). The possibility of another hike this month in the U.S. following the tightening in December is very low.
The issue is whether its chair, Janet Yellen, will hint at a revision in its monetary policy — from the former stance of gradual hikes to more gradual hikes in consideration of China’s slowdown.
Such statements from her are urgent for Korea. In that scenario, the won could be stabilized at around 1,150 won.
