Anxiety over hike in U.S. Fed rate

The expected interest rate hike by the U.S. Federal Reserve this week will have a significant impact on the Korean securities market and the real economy, further raising concerns about greater financial volatility and bursting household debt bubbles.

The future direction of the stock market will hinge on the result of the U.S. Fed’s Federal Open Market Committee meeting on Tuesday and Wednesday, when the U.S. central bank is highly expected to raise its key interest rate by 0.25 percentage points for the first time in nearly in a decade.

Analysts at local securities firms are divided over the outcome of the possible rate hike on the local market. While some say a rate hike would be safe from capital outflows thanks to robust foreign exchange reserves, others say volatility will be greater this week due to higher emerging market risks.

“Before and after the U.S. Fed makes its decision on the rate lift, the Korean stock market needs short-term risk management,” Lim Eun-hye, a researcher at Samsung Securities, said. “Combined with the U.S. rate hike, falls in oil and other commodities prices could trigger more uncertainties in emerging economies.”

When there was heightened speculation about an increase in the U.S. rate in September, Seoul’s main bourse Kospi showed a 1.8 percent rally from Sept. 1 to 17, while the secondary tech-heavy market Kosdaq slid 2.3 percent.

“This time, until uncertainties fade away, ups and downs in the Kospi could be limited as it was in September, with low-valuation stocks showing a little bullish,” Lim said.

Park Hyung-joong, an economist at Daishin Securities, said that raising the U.S. rate would put emerging economies at higher risk, since many of them are now reliant on borrowings.

“The Korean market is very vulnerable to external risks,” Park said. “The upward change in the U.S. rate will multiply emerging market risks, which will lead to rapid foreign capital outflow and cause the Korean won to depreciate.”

Park forecast the Korean won’s value against the U.S. dollar could surge to 1,300 won by mid-2016.

To prepare against a rapid outflow of foreign capital in the wake of the U.S. rate increase, the government and the ruling Saenuri Party are considering lowering the tax rate on foreign investors who invest in Korean bonds.

In a report on Sunday, the Korea Chamber of Commerce & Industry said that Korea is relatively safe from the negative impact of the Fed’s rate decision, as the country has enough foreign exchange reserves that amount to $374.7 billion. The institution estimated as much as $270 billion could leave the country after the rate hike.

As for the real economy, experts are mostly worried about the household debt problem. Due to the eased loan-to-value (LTV) and debt-to-income (DTI) regulations, many Koreans purchased houses with debt this year, following the government’s lead to revitalize the housing market.

Thanks to the financial authority’s loosening of the LTV and DTI rules, housing transactions surged 50.1 percent in the first six months of this year compared to the same period last year.

The total number of transactions recorded was 1.1 million as of November, up 21 percent from a year earlier. The figure is the largest ever. The previous record was 1.08 million in 2006.

At the same time, the country’s aggregate household debt reached an all-time-high of 1,166 trillion won as of the third quarter, largely due to the sharp growth in mortgages. Analysts expect the total figure will surpass 1,200 trillion won by the end of this year.

Korea’s rising household debt doesn’t seem to have noticeable problems, but it is exposed to the upcoming interest rate hike, said Ding Ding, senior economist of the International Monetary Fund’s Asia and Pacific department, at a Bank of Korea-IMF forum, which was held in central Seoul on Friday.

“When leveraging outstrips fundamental economic capabilities, debtors’ debt burdens surge, which can be constraints on consumption or investment activities,” said Lee Ju-yeol, governor of the Bank of Korea (BOK) at the same forum.

Lee called on the country’s financial authority to take action to curb the debt level. The Financial Services Commission plans to announce its household debt management measures today, including stricter rules for lending.

If Korea’s interest rate climbs in the future, people will feel the pinch more as they have to pay more interest out of the same monthly income level, causing them to cut back on other spending. This might have the opposite effect of the government’s intention to improve consumer sentiment and boost consumption by forcing local retailers to hold discount events such as “Korea’s Black Friday.”

As the BOK’s Monetary Policy Committee froze the rate at 1.5 percent last Thursday, Gov. Lee made it clear that there would be no immediate reaction to the Fed’s expected action.

“A rate hike by the U.S. Fed will not directly lead the BOK to adjust its rate upward,” Lee said. “Our base rate already reflects the expected rate increase, and we have enough time to respond to it.”

According to Kim Seong-hoon, research fellow at Korea Economic Research Institute, Korea’s monetary policy needs to be loosened for the next three years, due to the massive household debt issue. “The current situation of the Korean economy is very similar to that of early 2000 when credit bubbles burst due to an investment boom in IT start-ups and the reckless use of credit cards,” Kim said.

“For the next three years, the Korean monetary policymaker needs to decouple its monetary policy from that of the U.S., which will make gradual increases until 2019,” Kim said.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]