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Amid great confusion and criticism, the U.S. Federal Reserve finally made it clear that the long-waited tapering will happen in the months of November and December. As expected, the Fed announced that the purchase of government and agency bonds will be reduced by USD 15 billion every month starting from this November. If this speed of tapering is maintained, it will take eight months for the entire asset purchase program to expire. That is, the Fed will purchase zero government and agency bonds after June 2022. Of course, this schedule depends on the critical assumption that there will be no change in the economic outlook. The schedule of tapering could be altered at any time when the economic outlook changes. A sudden surge in the inflation rate could speed up the process of tapering, and an unexpected slowdown in employment or growth would retard its progress.
Should interest rates rise in times of tapering, real economic activities such as consumption and investment would also come under its negative influence. The real economic growth rate will tumble down, and firms with lower productivity and unsecure capitalization will fall victim to the tapering. Therefore, conspicuous negative impact on real economic growth and the financial markets are expected for some of the less secure emerging countries like Brazil or India.
No matter what happens in the future, the decision to decelerate the pace of asset purchase is a historical moment on its own, as it sounds a trumpet of herald that a new era of tight credit and dear money is about to come. Easy money is rarely possible, and reckless investment has to become extremely costly. Investment under a tight credit environment must be carried out more carefully, and requires great assiduousness in searching for a lucrative opportunity.
In this respect, investment opportunities in Korea loom even greater under the time of global tapering. As investors tend to look for lesser risks under higher costs of funds due to tapering, there seems to be no other country fit better for investment than Korea as its firms are solid in productivity and the government as well as financial institutions are more than willing to support their technological development. With higher costs of investment funds, it is natural for investors to seek lower risks and higher productivity, and Korean firms perfectly suit their specifications. Eager to invite foreign investment, top Korean officials endeavor to deregulate all facets of business activities in the country. Providing tax incentives, speeding up paperwork processes, removing various red tape, and above all, wholeheartedly embracing a welcoming attitude towards foreign investors have dramatically changed the investment environment in Korea.
Of course, Korea is not entirely free from the negative effects of tapering. Korea’s central bank probably has to raise its policy rate, and credit will become very tight here, too. But the Korean economy and firms are relatively sturdy to successfully weather the tapering storm with ample foreign reserves and technological superiority, and that is why the tapering would provide greater opportunities for global investment in Korea.
By Professor Se Don Shin
Professor Emeritus, Sookmyung Women’s University
The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA