South Korea’s Finance Minister has removed the short-term risk of capital outflows from the Asian economy as global exchange rate differentials widen.
SeongJoon Cho | Bloomberg | beautiful pictures
BALI, Indonesia – South Korea’s finance minister has dismissed the short-term risk of capital outflows from the Asian economy as global exchange rate differentials widen.
Speaking to CNBC at the Group of 20 meeting in Bali, Choo Kyung-ho said capital outflows from a country do not occur due to a single economic driver – such as interest rate differentials – because of Investors are also affected by other factors, like the strength of an economy.
Choo, who is also the country’s deputy prime minister, admits there are concerns that the US could be headed for more drastic rate hikes, and that widening interest rate differentials could trigger capital outflows. Korea.
“The arbitrage has happened before a few times, but we haven’t experienced any major capital outflows,” he said on Friday, according to a translation by CNBC. “On that basis, I think capital outflows don’t happen simply because of the exchange rate difference.”
Capital outflow occurs when assets and money leave one country for another because of better investment returns, such as higher interest rates.
In June, US Federal Reserve raises benchmark interest rate by 75 basis pointsstrongest rate hike since 1994.
The US Federal Reserve is poised to make another big rate hike at its meeting in July with some traders betting last week on as high as 100 basis pointsafter US consumer inflation hit a 40-year high of 9.1%.
Fundamentals are the key
“The most important things are the fundamentals of the economy, whether the economy can show credibility to the market. These are the factors that move capital,” Choo told CNBC. by Martin Soong.
However, South Korea’s Finance Minister said the Fed’s aggressive interest rate hike – an effort to curb inflation – remained cause for concern. The growing difference in borrowing costs between the US and South Korea could prompt capital flows between the two countries to decline, he added.
… I am not worried about any sudden capital outflows.
Choo Kyung-ho
Finance Minister of Korea
The recent inflow of capital into the South Korean economy, especially into the treasury market, has also helped ease concerns about capital outflows, Choo added.
“The Korean economy is having a smaller adjustment than the global economy. And it is still recovering,” he said.
“That’s why I’m not worried about any surge in capital.”
Last week, the Bank of Korea acknowledged that there are risks to capital outflows when trading a historic half-point rate hike in an attempt to rein in rising prices, when inflation soars fastest rate in 24 years.
Concerns about capital outflows, or capital flight, are beginning to emerge as central banks around the globe race to raise interest rates in an effort to contain rising inflation.
Differences in exchange rates between markets – especially with some markets like the US favoring stronger interest rate hikes – can start to drive hot cash flow as investors look for better returns.
Past capital flow breakdowns include money movement in response to US quantitative easing measures after the The usury crisisincluding increased liquidity and decreased interest rates.
The weakening of the US dollar has forced capital inflows into other markets such as emerging economies in Asia, increasing inflationary pressures and strengthening currencies in those markets.
Hot cash flow in Asia?
Economists have begun to warn of this hot money outflow.
There are concerns about capital outflows from India, particularly as the US is actively raising interest rates and weakness is emerging in the economy, Mizuho Bank analysts said in a note last week. Indian economy.
India record trade deficit of $25.6 billion in June, due to the sharp increase in imports of crude oil and coal.
“This will exacerbate volatile capital flows, at a time when the Fed has pledged to raise interest rates aggressively, meaning downward pressure on INR prices,” said analysts Vishnu Varathan, Lavanya Venkateswaran and Tan Boon Heng. bigger”.
“The Reserve Bank of India, acutely aware of this predicament, is preparing for further rate hikes.”
Thailand may also consider more rate hikes to keep pace with Fed gains amid bearish momentum Thai Baht “Threatened to exacerbate import inflation and exacerbate capital outflows in an adverse feedback loop,” the analysts said.
China’s economy Larry Hu, chief China economist at Macquarie Group, said in a note last month there could also be increased pressure on capital inflows due to rising US interest rates despite the country’s slowing economy. China itself is the more likely driver for the money, Larry Hu, chief China economist at Macquarie Group, said in a note last month.
