Despite Bernanke Shock, Foreign Capital Inflow into Bonds Continues and Exports May Rise in the Long Term

The Ministry of Strategy and Finance convened an emergency session of the Macroeconomic Finance Meeting on Sunday to examine the Korean financial and foreign exchange markets after U.S. Federal Reserve Chairman Ben Bernanke announced earlier that week that the Fed plans to scale back on quantitative easing. 

Vice Chairman of the Financial Services Commission (FSC) Jeong Chan-woo, Deputy Governor of the Bank of Korea (BOK) Pak Won-shik, Senior Deputy Governor of the Financial Supervisory Service (FSS) Kim Gun-seop and President of the Korea Center for International Finance (KCIF) Kim Ik-joo and others attended the meeting to examine how the domestic and global financial and foreign exchange markets have been affected by Bernanke’s announcement and to discuss future plans. 

Bernanke’s recent talk on a quantitative easing slowdown has sent jitters around the global financial market – stock markets slumped, government bond rates moved higher and the currencies of emerging economies weakened – and global stock prices were dragged down due to concerns over an early end to quantitative easing and China’s weak manufacturing index. In Korea, shares slid and interest rates and exchange rates rose as foreign capital fled and market volatility increased.

This year, there was a net outflow of foreign capital in the Korean stock market due to the slow economic recovery and the Vanguard MSCI Emerging Markets ETF’s transition to the FTSE index. However, the bond market saw a net foreign capital inflow of more than KRW 9 trillion and the net inflow trend is continuing even after Chairman Bernanke’s remarks. 

However, with the economic downturn in Europe, the slowdown in emerging economies’ growth and uncertainties surrounding Abenomics, Bernanke’s comments have spurred capital outflow from emerging economies, making a short-term rise in market volatility highly likely.

Nevertheless, it can be interpreted that Bernanke’s comments are based on confidence that the U.S. economy will make a rapid recovery. Also, the Korean economy’s fundamentals – financial soundness, current account surplus, foreign exchange reserves and foreign loan structure, etc. - are stronger than those of other emerging countries. In this regard, a rapid and massive capital outflow is unlikely, and in the mid-to-long term, the U.S. economy’s recovery may lead to an increase in exports.

To keep market anxiety from growing, the Korean government will take the following four measures:

Establish a stronger 24-hour global monitoring system through close cooperation with the Ministry of Strategy and Finance, the FSC, the BOK, the FSS, the KCIF and the Korea Investment Corporation.

Provide accurate and reliable information to foreign investors and actively promote that Korea’s economic fundamentals are sound and stronger than that of other emerging economies.

Seek prompt and active measures to stabilize the financial and foreign exchange markets against uncertainties and prepare measures to strengthen liquidity in the financial sector (e.g. conduct stress tests) and prevent herding behavior in the market caused by an increase in volatility. 

Strengthen cooperation with other governments and central banks through the G-20 Finance Ministers’ Meeting in July and further enhance the fundamentals of Korea’s financial and foreign exchange markets by improving the country’s foreign debt structure and strengthening the soundness of financial companies, so that the market’s concerns over rising volatility in the global financial market can be minimized.