Korea faces growing risks in second half

Deputy Prime Minister and Finance Minister Hyun Oh-seok urged economy-related ministers to increase their monitoring of the financial markets to counter negative external factors.

In a meeting with the ministers on Thursday, Hyun said the eurozone recession and China’s slow growth, below the 8 percent threshold, could dampen Korea’s recovery efforts in the second half of this year.

The deputy prime minister had previously mentioned that the government would counter volatility through “proactive” macroeconomic measures.

Even though the U.S. is expected to recover toward the end of this year, its planned exit from monetary stimulus poses a risk to Korea’s economy, according to a report by the finance minister.

“The tapering of the U.S. monetary stimulus could increase uncertainties not only for the Korean financial markets but for the real economy in the second half of this year,” the report said.

The stimulus unwinding could drive up market interest rates, which in turn could further burden households and private companies as borrowing costs increase.

This could then adversely affect consumer sentiment and private investment, it added.

Uncertain outlooks from the U.S. and China along with Japan’s Abenomics are likely to increase market volatility in Korea, where the stock market has gone through choppy trading in past weeks.

The effects of Japan’s Abenomics ― the combination of fiscal spending, monetary easing and structural reforms ― would be limited on the Korean economy.

But as the U.S. prepares to unwind its monthly bond-purchasing on the back of improvement in the job market, the dollar is expected to strengthen and the Japanese yen weaken, the Finance Ministry noted.

An exit from stimulus measures in the U.S. and Japan next year could increase capital outflows, market interest rates and foreign exchange rates in Korea.

Hyun previously said during the G20 finance leaders’ meeting in Moscow last week that global economies needed to coordinate their policies to preemptively buffer these negative side effects of stimulus exits.

He added that advanced economies that have implemented aggressive monetary easing should send a clear message of their future exit strategy to lessen the negative impact on global financial markets.

Federal Reserve Chairman Ben Bernanke recently testified before the House Financial Services Committee that it would continue to implement “a highly accommodative monetary policy” as long as the U.S. unemployment rate remains high and inflation stays below its target of 2 percent.

By Park Hyong-ki (hkp@heraldcorp.com)