Experts disagree over emerging market woes

The financial crunch engulfing some emerging markets in the world appears to have worsened after the U.S. Federal Reserve decided to continue tapering its quantitative easing this month.

The U.S. plan, announced last Wednesday, to reduce America’s bond-buying program to $65 billion from $75 billion last month sent a shiver through many emerging economies, and its impact on the Korean bourse will be felt today as the Lunar New Year holidays come to a close.

Local analysts, however, are split as to whether emerging market woes will trigger a crisis for the Korean economy, as it did in the late 1990s.

Lee Seung-joon, a senior researcher at Hi Investment and Securities, expressed skepticism.

“We are no longer in an era where the recovery of the U.S. economy will automatically lead to the recovery of the global economy,” he said.

“Because Korean companies’ dependence on emerging markets for their exports has increased, as much as they now make up a third of the destination for Korean export, the Korean economy could be affected by the crisis of the emerging markets.”

Shin Min-young, head researcher at LG Economic Research Institute, had a similar stance.

“A financial uneasiness could spread from Indonesia to Thailand, Malaysia and even the whole Southeast Asian region. And if that happens, it could have an impact on our economy,” said Shin.

Benoit Anne, head of emerging markets strategy at Societe Generale, claimed that the global economy has already entered the “contagious phase” of a financial crisis. He said it is meaningless to argue over which emerging country is less volatile. Investors should sell off emerging markets immediately, Anne added.

Still, others were positive, arguing that the fundamentals of the Korean economy have strengthened substantially compared to 1997, when the International Monetary Fund stepped in to help stabilize the country’s currency.

Currently, Korea has record-high foreign reserves worth $345 billion. Only six other countries, including China, Japan and Switzerland, have larger foreign reserves than Korea. The amount of foreign deposits in Korea is also at a record-high level of $48.6 billion.

Lee Jong-woo, the head of the research division at IM Investment and Securities, said the tapering of quantitative easing has already been factored into the markets and would not have a substantial additional impact on the global economy.

“The U.S. economy entering a recovery phase is more important for the Korean economy than the financial crisis of emerging markets originating from Argentina or Turkey,” Lee said.

Lee said the tapering could actually work in Korean exporters’ favor by stemming the weakening of the Japanese yen. “The won has weakened about 3 percent compared to the beginning of the year,” Lee said. “A condition is building in which local exporters hit hard by a weakened Japanese yen ... could hit back.”

Jeong Chan-woo, vice chairman of the Financial Services Commission, said at a meeting on Thursday that some funds that escaped from some risky emerging markets could flow into the Korean financial market.

“The U.S. decision to reduce the quantity of its currency is based on its judgment that the economy is recovering, so Korea’s export to the U.S. could increase,” Jeong said.

BY PARK TAE-HEE, MOON GWANG-LIP [joe@joongang.co.kr]