[Editorial] Bernanke shock

The domestic financial market is likely to remain volatile for the time being as the U.S. Federal Reserve has sent global financial markets into turmoil by hinting it could end its massive stimulus program next year.

Ben Bernanke, the chairman of the Fed, has said if the U.S. economy recovers as expected, the bank could start winding down the $85 billion monthly bond purchase program this year, possibly ending it around mid-2014.

To allay investor concerns, he said in the same breath that the asset purchase scheme, known as quantitative easing, would continue at the current pace until unemployment fell to around 7 percent. The jobless rate currently stands at 7.6 percent.

As the Fed’s exit strategy comes into sight, Korean policymakers need to step up their monitoring of international capital flows. An outflow of foreign funds will be inevitable as the U.S. greenback gains strength against the Korean currency.

In fact, foreign investors have already started to unwind their investments in Korean assets. This month alone, they net sold stocks worth 5.5 trillion won and bonds worth 3.8 trillion won.

According to the Financial Supervisory Service, foreign capital inflows since the first round of quantitative easing in 2008 have totaled 71.6 trillion won. Of it, 42.8 trillion won was invested in stocks, with the remaining 28.8 trillion won in bonds.

It remains to be seen how much of the foreign capital would leave the domestic market. Korean policymakers say drastic capital outflows are unlikely in light of the strong fundamentals of the Korean economy. They may be right.

Korea also holds large foreign reserves, which stand at around $330 billion. And short-term foreign debt accounts for less than 30 percent of its total external debt.

But policymakers should not let their guard down. They need to take steps to minimize financial instability as it would negatively affect the already slow pace of economic growth.

The Bank of Korea will have to increase credit supply to domestic companies as liquidity will contract amid capital outflows.

Economic experts note that the scaling back of the stimulus program could rather benefit the Korean economy. The Fed’s move, they say, will strengthen the greenback against the Korean currency, making Korean exports more competitive in global markets. The recovery of the U.S. economy will also increase demand for Korean goods. As Moody’s notes, these prospects could make foreign capital head toward Korea.