South Korea not worried about capital outflow for now: finance minister

South Korea’s finance minister dismissed short-term risks of capital outflows from the Asian economy as the global rate gap widens.

SeongJoon Cho | Bloomberg | Getty Images

South Korea’s finance minister dismissed short-term risks of capital outflows from the Asian economy as the global rate gap widens.

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

Choo, who is also the country’s deputy prime minister, acknowledged that there are concerns that the US could be on the path to more aggressive interest rate hikes, and a widening interest rate gap could trigger capital outflows from South Korea.

“The rate differential has happened several times, but we haven’t experienced any major capital outflows,” he said on Friday, according to a translation by CNBC. “Based on that, I don’t think capital outflows are happening just because of the rate differential.”

Capital outflows occur when funds and money move from one country to another because of a better return on investment, such as higher interest rates.

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

The US Federal Reserve is poised to make another significant interest rate hike at its upcoming July meeting with some traders betting on a hike of as much as 100 basis points last week after US consumer inflation hit a 40-year high of 9.1% .

The basics are key

“The most important things are the fundamentals of the economy, whether the economy can demonstrate reliability to the markets. Those are the factors that drive capital,” Choo told CNBC’s Martin Soong.

But South Korea’s finance minister said the Fed’s aggressive rate hikes — an attempt to curb inflation — remained a cause for concern. A widening gap in borrowing costs between the US and South Korea could accelerate capital flows between the two countries down the line, he added.

… I’m not worried about dramatic capital outflows.

Choo Kyung-ho

Minister of Finance of South Korea

Recent capital inflows into South Korea’s economy, particularly into the treasury markets, have also helped ease concerns about capital outflows, 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’m not worried about dramatic capital outflows.”

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

Concerns about capital flight, or capital flight, are starting to emerge as central banks globally race to raise interest rates in an effort to curb rising inflation.

The disparity in rates between markets — especially with some markets like the US favoring more aggressive rate hikes — may start to drive hot money flows as investors seek better yields.

Incidents of capital flight in the past include money movements that responded to US quantitative easing measures after the sub-prime crisis, which included increased liquidity and lower interest rates.

The weakening US dollar has forced capital into other markets such as developing economies in Asia, raising inflationary pressures and currency appreciation in those markets.

Hot money outflows in Asia?

Economists began to warn about this round of hot money flows.

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

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

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

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“The Reserve Bank of India, acutely aware of this predicament, is preparing for further interest rate hikes.”

Thailand may also consider further rate hikes to keep up with the Fed’s rate hikes amid a depreciating Thai baht that “threatened to worsen imported inflation and worsen capital outflows in a negative feedback loop,” analysts said.

China’s economy could also experience increased capital outflow pressures as a result of rising US interest rates, although China’s own subdued economy was a more likely driver of cash flows, Larry Hu, Macquarie Group’s chief China economist, said in a note last month.

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