[VIEWPOINT]Nervous time for Korean market

It is natural that one will get frightened at the slightest indication of a disaster that one has suffered from previously. Although Korea’s trade volume and capital transactions are in enormous amounts, we cannot use the Korean won as a means of settling international business deals. As a result, although we have a foreign exchange reserve of $200 billion, we feel uncomfortable when the outflow of capital continues for some time. Perhaps this is because the memory of our foreign exchange crisis, in which our national economy crashed to the bottom when overseas capital suddenly poured out of the country like flood water, was so painful for us.
Since the recent outflow of capital took place mainly from funds invested in securities, it is not proper to consider the movement of capital as a harbinger of a foreign exchange crisis like we suffered in the past.
At that time, the outflow of capital took place over a wide area. Not only did funds invested in securities flow out of the country, but also the rollover of loans Korean banks and businesses had borrowed from overseas financial companies was not possible, and even some foreign companies that had advanced into the Korean market withdrew.
Compared to the situation before the foreign exchange crisis of 1997, we can see that there are fundamental differences as there are reports that foreign investors are still buying office buildings offered for sale in Seoul. At that time, large-scale capital outflows had started in Southeast Asian countries like Thailand, then spread to Northeast Asia. Korea was the last country to be affected by the financial crisis.
Recently, however, it is said that international funds are lowering their investments in the Korean stock market especially. For example, among six Asian countries ― South Korea, Taiwan, India, Thailand, the Philippines and Indonesia ― South Korea and Indonesia are the countries where foreign investors sold shares in excess of their purchases, in net sales of $3.1 billion worth of shares in South Korea and $1.7 billion worth of shares in Indonesia. According to statistics compiled up to August of this year, Korea is the only one among the above-mentioned countries that saw net sales of over $8.8 billion worth of shares by foreign investors. Although the present situation is far from that of the foreign exchange crisis, we cannot deny that the trend goes in a worrisome direction.
Experts on the security market explain that foreign investors are in the process of lowering investment in Korean shares since they invested relatively high amounts in Korean shares up till now, and that there are a couple of factors that add to this process. They quote the following as such factors: The flow of capital to a market where investors can expect higher profits than from the Korean market; relatively slow business in the information technology sector; and large foreign exchange gains investors can get from selling Korean won and buying U.S. dollars instead due to a high-revaluation of Korean won. However, such explanations do not sound persuasive as information technology is also an important industry in the other countries mentioned above, and the revaluation of national currency is not limited to South Korea.
Of course, the behavior of investors in the stock market is not always reasonable. Still, their behavior is too consistent to consider this a short-term collective behavior without reason, because the outflow of capital from our market has continued for almost two years now. In the long run, the movements of a nation’s stock market is proportionate to the value of its businesses and the vitality of its overall economy. If we interpret most recent trends from this viewpoint, foreign investors are leaving our market because there is an estrangement in their expectations of the Korean economy that they had till two years ago, from the reality. That is, they are showing their sentiment with their feet. A continued slowdown in the growth of our exports in the past three years and stagnant domestic consumption that shows no sign of recovery are the important economic reasons for their departure.
Together with the question of whether the Korean economy can recover its vitality in a short time, such non-economic factors as accusations of using hedge funds as speculative funds, the North Korea problem, unclear foreign policy and political conflict during the upcoming presidential race are gathering like dark clouds, making Korea look like a country investors should avoid for the time being for their own safety.
Despite such risk factors, if there is a prospect of recording much higher economic growth than expected, many investors will stay in the Korean market. But the possibility is very low and that is not only the case with foreign investors. As the empty places they left are filled by domestic investors such as pension funds, the damage from a downpour, if there is a flood, will not be small. The outflow of some domestic capital seems to reflect such worries.

* The writer is the head of the Economic Research Division of the Korea Economic Research Institute. Translation by the JoongAng Daily staff.

by Hur Chan-guk