Market shows some resistance

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Market shows some resistance

The impact of U.S. Federal Reserve Chairman Ben S. Bernanke’s somewhat vague testimony on Wednesday regarding the future of the central bank’s stimulus program on Seoul’s stock markets yesterday was limited.

Bernanke, in what could be his final appearance before the House Financial Services Committee before his term ends in January, offered reassurances that the Fed is committed to bolstering the economy and that it could increase its asset purchases if necessary. At the same time, he said the Fed could begin tapering its stimulus when conditions are right.

The testimony boosted many Asian stock markets, but the Seoul bourse retreated 0.64 percent to close at 1,875.48.

“Unlike other emerging markets’ foreign exchanges that saw sharp changes since the Fed’s June meeting, Korea’s won has been relatively stable,” said Han Beom-ho, a Shinhan Investment analyst. “Its response to the possibility of change in the U.S. liquidity position was quite steady.”

According to Han, the Korean market has suffered because of external events for the past three years. He cited the Greek financial crisis, the downgrade of U.S. credit ratings and fears that Greece might leave the EU.

Every time there were uncertainties in the global market, the Kospi fell even more than the MSCI index on emerging markets, which includes Brazil, India, Indonesia, Thailand, Taiwan and the Philippines. Even the depreciation of the won was much faster than the currencies of other emerging markets.

But since May 22, when Bernanke hinted that the Fed might start scaling back its $85 billion asset purchase program later this year if the U.S. economic recovery stabilized, the local financial market has been less swayed by such external developments than other emerging markets.

While the value of currencies in emerging markets has fallen 5 percent on average since May 22, the Korean won value has dipped only 0.7 percent. Furthermore, the Seoul market fell 5.3 percent compared to the 7.3 percent drop of the MSCI emerging market index.

Recent concern by emerging markets centers on the possibility of foreign investors pulling out as a result of reduced liquidity in the United States, said the Shinhan analyst, adding that the Korean market seems to have built up its defenses against external disruptions since the global financial crisis of 2008.

“One piece of evidence is persistently growing foreign reserve holdings,” said Han.

Korea’s foreign reserves recorded an all-time high at $328.9 billion in January. Although the level in June was the lowest in seven months at $326.3 billion, it was still the seventh largest in the world.

China tops the lists with $3.4 trillion won followed by Japan ($1.3 trillion), Russia ($518.4 billion), Switzerland ($514.8 billion), Taiwan ($406.6 billion) and Brazil ($374.4 billion).

Additionally, short-term debt of 122.2 billion accounted for only 34.3 percent of foreign reserves as of the end of March. In the third quarter of 2008, Korea’s short-term debt was 80.8 percent of foreign reserves.

Even if roughly 30 percent of foreign investment ($700 billion the end of the first quarter) exits Korea, the country could counter by dipping into its foreign reserves.

In 2008, 33 percent of foreign investments, including stocks and bonds, exited the country. When the U.S. credit rating was downgraded, 9.9 percent of foreign investments left.

The Korean government also expressed confidence in a report released late last month as the market was still concerned over the possibility of an end to the Fed’s stimulus program.

The Finance Ministry said it had prepared several measures to address the situation, noting that Korea has a strong economic foundation.

The Finance Ministry displayed confidence that foreign investors would continue to invest in Korea and that even if they exit their investment in treasuries is relatively small compared to other countries.

“Since 2008, roughly 100 trillion won or so in foreign investment went into buying stocks and bonds,” the report said. “And even in 2008, the actual amount of foreign investment that exited the country was about 45 trillion won.”

The government, citing foreign reports including Moody’s and Morgan Stanley, said even when the United States ends its quantitative easing, the negative impact would be limited in Korea, which would benefit from a strong, stable U.S. recovery.

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