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Korea Strong Enough to Withstand Foreign Capital Outflow

Korea has enough strength to withstand foreign capital outflow caused by external shock, according to a report by Lee Chang-sun, a researcher at the LG Economic Research Institute. In the July 7 report, titled "Emerging economies to be hit by U.S. exit strategy, but Korea will remain strong," Lee analyzes that Korea has grown more resistant to external shock after the global economic crisis.

Total net inflow of foreign capital into Korea’s stock, bond and other investment markets from January 2009 to May 2013 reached USD 155.9 billion. Foreigners’ holdings of Korean stocks and bonds currently amount to USD 366.7 billion and USD 87.5 billion, respectively.

If the United States scales back on quantitative easing, foreigners are likely to withdraw from the Korean market.

Lee forecast that in a worst-case scenario, Korea will see a total outflow of USD 273.7 billion, which is the sum of short-term foreign loans and one-third of foreign holdings in Korean stocks and bonds. However, he expected that the Korean economy is strong enough to withstand the outflow given that Korea’s foreign exchange reserves reached USD 326.4 billion as of the end of June. Lee also added that “Korea’s ability to withstand the outflow is even stronger when considering the inflow of foreign currency from current account surplus.

According to Lee, a large-scale outflow of foreign funds is unlikely, because the Korean financial market has become less sensitive to external shocks and the Korean economy’s fundamentals are stronger than that of other emerging economies.

However, Lee anticipated that foreign capital outflow will occur to some extent as the Korean won is not a safe asset. Noting that short-term uncertainties were seen in the Korean financial market when the U.S. raised its interest rate in the 1990s and 2000s, he argued that preparations need to be made and said, “The government should not let corporate and household debt accelerate the outflow of foreign capital, and should focus more on microeconomic measures rather than the benchmark interest rate to stabilize the bond market.”

Source Text

Source: Yonhap News (July 7, 2013)

** This article was translated from the Korean.

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