The South Korean financial sector is gearing up for turbulence in the global market in light of the high possibility of a US interest rate hike and the impact of the US presidential election.
Lee Ju-yeol, governor of the Bank of Korea, said Friday that the central bank would take timely measures to ease growing market anxiety if the uncertainties spread across the sectors, posing a threat to the financial system.
“It is still hard to judge how significant the impact of the surprising US election result will be on the Korean financial market,” Lee said at a meeting with the heads of nine commercial banks. “The BOK is watching over the financial and foreign exchange markets extremely cautiously and bracing for implementing measures in a timely manner when market worries continue growing.”
Such remarks came about a week after Donald Trump won the US presidential election and just a day after Federal Reserve Board Chair Janet Yellen signaled an interest-rate hike could be imminent.
Yellen told lawmakers Thursday that the Fed is close to raising borrowing costs as the US economy continues to gain traction, in her first public statement since the US election.
Seoul’s main bourse Kospi remained bearish Friday morning due to the Fed chair’s comment overnight, hovering below the 1,980 mark, largely because of a strong selling spree by foreign investors.
“As the Fed is moving toward boosting the key rates in December, uncertainties at home and abroad are continuing to grow,” said Lee Kyung-min, an analyst at Daishin Securities. “The Kospi may attempt to rebound, but is highly likely to remain sluggish.”
The Kospi closed at 1,974.58 on Friday, down 0.3 percent from the previous trading session. The tech-heavy Kosdaq slid 1.19 percent to 620.26.
The foreign exchange market was also affected by Yellen’s comments, which sent the won-dollar rate above the 1,180 won level Friday morning.
It is the first time that the won’s value has fallen to that level against the US dollar since June 27 when a British referendum supported Britain leaving the European Union.
The Korea Center for International Finance said in a recent report that US rate hikes may occur faster with the incoming Trump administration, and such a move would have a negative impact on emerging economies.
“International economic experts forecast that the Fed will increase its rates twice or three times next year after doing so once in December,” the report said. “As the Trump administration is expected to adopt expansionary fiscal policies, US inflation rates are projected to rise, strengthening the dollar.”
If the US raises its federal fund rates more quickly than markets expect, the Korean foreign exchange and stock markets are forecast to be hit hard.
“Foreign investors are seemingly aggressive in buying local stocks when the won-dollar rate stays below 1,150 won, but above that level, they apparently start selling,” said NH Investment & Securities in a report that analyzed foreign investment trends in accordance with foreign exchange rate changes since 2010.
The Korean currency lost 7.35 won in value against the US dollar on Friday, closing at 1,183.25 won.
Market uncertainties are not likely to fade away until the new Trump administration comes up with a clear direction for its economic policies and the Fed takes any action.
“If the uncertainties continue to remain, banks will face worsening conditions to finance foreign currencies,” Gov. Lee said. “The smooth management of foreign currency-denominated funds through bond issuances is key to keeping banks’ fiscal soundness and reducing risks.”
The BOK is planning to extend the overseas transaction time from the current 5:30 p.m. to 6:30 p.m. starting from the first quarter of next year, to help banks reduce risks in overseas transactions involving foreign currencies.
By Song Su-hyun (song@heraldcorp.com)
