BOK warns of emerging market debt

Mounting household debt is one of the key aggravating risk factors facing emerging economies including Korea, the central bank chief told corporate executives Tuesday.

“When it comes to the previous financial crises, there was excessive credit (from financial firms) to the private sector (as a core trigger),” Bank of Korea Gov. Lee Ju-yeol said in a speech at a Korea Chamber of Commerce and Industry meeting in Seoul.

Korea saw its household debt reach an all-time high of 1.13 quadrillion won ($965 billion), while outstanding loans to households have snowballed this year thanks to the record-low benchmark rate of 1.5 percent.

Regarding a potential rate hike in the U.S., Lee appeared more cautious.

“Despite the recent terrorist attacks in Paris, there is a high possibility that the (U.S. Federal Reserve) will raise the base rate in December,” he said.

Korean stocks fell to a 50-day low on the previous day as the attacks in France over the weekend roiled Asian financial markets.

His comments on the huge outstanding loans and the likelihood a U.S. hike do not indicate the BOK’s intention to cut key rate, according to local analysts.

A securities firm researcher said Lee’s remarks even hint at a rate hike in Korea in the coming months ― in keeping with the U.S.’ tighter monetary policy ― to curb consumer debt and prevent a massive capital outflow.

President Park Geun-hye also expressed concerns about the possible negative effects from a U.S. rate hike.
 

During her speech in an economy-related session at the Group of 20 forum in Turkey, Park said that “normalization (hikes) of interest rates in developed countries should be conducted on a gradual basis in consideration of impacts on the global economy.”

Park said capital flight from emerging countries is expanding in the wake of their slowdown as well as the dominant projections on a hike during the Federal Reserve’s Federal Open Market Committee meeting, slated for Dec. 15-16.

She also suggested active policy coordination of G20 members in case of volatility in the international financial market.

According to the Korea Exchange, foreign investors net sold local stocks worth more than 1 trillion won over the past week, including 149.3 billion won during the trading session on Tuesday.

By Kim Yon-se (kys@heraldcorp.com)