S. Korea not worried about capital outflows so far: finance minister

South Korea’s finance minister ignored near-term risks of capital outflows from the Asian economy as global credit spreads widen.

Seong Joon Cho | Bloomberg | Getty Images

South Korea’s finance minister ignored near-term risks of capital outflows from the Asian economy as global credit spreads widen.

Speaking to CNBC at the Group of 20 meeting in Bali, Choo Kyung-ho said capital outflows from a country are not the result of a single economic driver – such as interest rate differentials. – since investors are also influenced by other factors. , like the strength of an economy.

Choo, who is also the country’s deputy prime minister, acknowledged that the United States is worried about heading for more aggressive rate hikes and that the widening of the rate differential could trigger capital outflows from Korea. from South.

“The rate gap has happened several times before, but we haven’t seen any significant capital outflows,” he said on Friday, according to CNBC’s translation. “Based on that, I think capital outflows don’t just happen because of a rate differential.”

Capital outflows occur when assets and money leave one country for another due to better investment returns, such as higher interest rates.

In June, the US Federal Reserve raised benchmark interest rates by 75 basis points, its most aggressive rate hike since 1994.

The US Federal Reserve is poised for another big rate hike at its upcoming July meeting, with some traders last week betting on a hike of up to 100 basis points, after consumer inflation in the US United States hit a 40-year high of 9.1%.

Fundamentals are essential

“The most important things are the fundamentals of an economy, if the economy can show its reliability to the markets. Those are the factors that move capital,” Choo told CNBC’s Martin Soong.

However, South Korea’s finance minister said the Fed’s aggressive interest rate hikes – an attempt to rein in inflation – are still a concern. The growing difference in borrowing costs between the United States and South Korea could accelerate capital flows between the two countries over time, he added.

… I fear no spectacular outflow of capital.

Choo Kyung-ho

South Korea’s Minister of Finance

Recent capital inflows into the South Korean economy, particularly in the Treasury markets, have also helped ease fears of outward capital flight, Choo added.

“South Korea’s economy is experiencing less moderation compared to the global economy. And it is still on the road to recovery,” he said.

“That’s why I don’t worry about dramatic capital outflows.”

Last week, the Bank of Korea acknowledged there were risks of capital outflows when it made a historic half-point interest rate hike in a bid to rein in rising prices, as inflation hit its fastest pace in 24 years.

Concerns about capital outflows, or capital flight, are beginning to emerge as central banks globally rush to raise interest rates in a bid to curb rising inflation.

The disparity in rates between markets – especially with some markets like the United States favoring more aggressive rate hikes – may begin to stimulate hot money flows as investors seek better yields.

Incidents of capital flight in the past include money flows reacting to US quantitative easing measures after the subprime mortgage crisis, which included increased liquidity and lower interest rates.

The weakening of the US dollar has forced capital to flow to other markets such as emerging economies in Asia, increasing inflationary pressures and appreciating currencies in these markets.

Speculative money outflows in Asia?

Economists began to warn against this cycle of speculative capital flows.

Analysts at Mizuho Bank said in a note last week that there were concerns about capital outflows from India, especially as the United States actively raises interest rates and that weaknesses are emerging in the Indian economy.

India posted a record trade deficit of $25.6 billion in June as imports of crude oil and coal surged.

“This will exacerbate volatile capital outflows, at a time when the US Fed is already engaged in aggressive rate hikes, implying greater depreciation pressures on the INR,” analysts Vishnu Varathan, Lavanya Venkateswaran said. and Tan Boon Heng.

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“The Reserve Bank of India, fully aware of this difficult situation, is preparing for further rate hikes.”

Thailand could also consider further rate hikes to follow the Fed’s rate hikes amid a depreciating Thai baht that “threatens to worsen imported inflation and exacerbate capital outflows in a feedback loop.” negative,” the analysts said.

China’s economy could also come under increased pressure from capital outflows following U.S. rate hikes, though China’s sluggish economy is the most likely driver of money flows, Larry Hu said. Macquarie Group’s chief China economist, in a note last month.

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