Economic fundamentals are crucialRepercussions from jittery emerging markets, triggered by capital flight amid a sharp plunge in Argentine currency and skyrocketing inflation, have reached our shores, an ominous sign for another Argentine economic crisis. The composite Korean stock price index plunged under 1,900 before ending Monday 1.56 percent down at 1,910.34 from last Friday. The U.S. dollar jumped 3.2 won to close at 1,083.6. Worries about tapering in the U.S. Federal Reserve’s massive bond-purchasing program accelerated a selling spree in emerging markets that have in recent years benefited from a rush of international capital in search of higher returns.
For the time being, the South Korean economy is safe from a currency crisis. Unlike battered emerging markets like Argentina and Turkey, the Korean economy has a low ratio of short-term foreign debt, sufficient foreign exchange reserves and strong surplus figures in its current-account balance. The local market may have responded in sync with other global markets hit with overall sell-off rather than being shaken on fears of a looming crisis. The fall in Korean stocks have been moderate compared with the losses in other advanced markets. There is no need to worry at this stage.
Still, we must be fully prepared for a spread in capital flight and the jittery investment spirit on a global level. Authorities should keep close watch on the domestic market’s movements and short-term capital inflows and outflows. If financial instability catches up and spreads out to all emerging markets, the recovery in the global economy could be stalled or even be reversed. If the currencies in emerging markets fall into a collective crisis and endanger the global economy, prospects for exports would dim and dampen a pickup in a domestic economy that primarily runs on overseas demand. The flashpoint is China, which accounts for 26 percent of our exports. If China’s economy slows due to the currency and liquidity crisis in emerging economies, Korea would then have to readjust its policy plan and targets.
Since the 2008 financial crisis, an international crisis is no longer exceptional and should be considered a regular possibility. To respond to this, local economies must strengthen resilience through routine checkups and structural buildups.