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(EDITORIAL from Korea Herald on Oct. 1)

All Headlines 09:13 October 01, 2016

Added risks
: Seoul needs to be vigilant to oil-dollar volatility, German bank fiasco

South Korea's economy involving the capital market averted shocks in September as the Federal Reserve again delayed its policy to raise the key interest rate. But the US monetary issue still remains a big uncertainty for the local market.

Further, two more external factors are aggravating uncertainty at the start of the fourth quarter: the crude oil issue centered on production in the Middle East and the Deutsche Bank woes in Europe.

Earlier this week, the Organization of Petroleum Exporting Countries agreed to trim crude oil output by at least 32.5 million barrels a day. Their consensus surprised the market, as Iran was not expected to cooperate with the move by Saudi Arabia and some other OPEC members to pull up oil prices. It marked the first time in eight years that the major oil producers reached a deal to cut output, though they might change their stance before the final accord is signed in about a month.

Predictions are divided over the level of future oil prices. While some global investment banks and crude futures traders predict a spike, some downplay the effect of an OPEC production cut, citing the possibility of US shale gas developers increasing their output again. It has been likened to a game of chicken between the Saudis and the US over the past few years.

Meanwhile, there is skepticism among some global investment banks as to whether OPEC can really sign a binding pact on reducing crude output at a time when Iran is aggressively seeking to expand exports and Iraq is expressing its discontent with the tentative deal.

International oil prices, anyway, will likely fluctuate in the coming weeks, just as markets did over the split projections of the Fed's rate decisions. And this, in turn, could bring about simultaneous volatility in the Korean currency's dollar exchange rate.

The won-greenback exchange rate's direction has become far more unpredictable. The hawkish stance of the Fed will cause a strong dollar, while an increase in oil prices will weaken the greenback as the two major global indexes are generally incompatible.

The situation could negatively affect Korean exporters in terms of hedging currency risks. Some of them could see heavy damages according to their cash settlement timing amid high volatility.

In addition, gasoline and diesel prices will shoot up domestically should crude prices continue to gain. This will weaken ordinary households' purchasing power and hamper a recovery in overall private consumption.

Though the formerly low crude prices of about $30-$40 a barrel undermined the profitability of some local industries last year, prices above $55 will certainly impose a far heavier burden on the overall industries of Korea, a non-oil producer.

Apart from oil, a giant bank-related trouble from the Europe is posing a threat to the global financial services market involving that of Korea.

Deutsche Bank has come into the spotlight in the wake of a $14 billion fine proposed by the US Department of Justice for misselling mortgage-backed securities in the heady days before the 2008 financial crisis.

The German investment bank's stock prices have lost more than half their value so far this year. The International Monetary Fund had reportedly showed skepticism over a bailout, saying that Deutsche is the greatest contributor to systemic risk at the world's biggest lenders. The German government has yet to decide whether to bail it out.

Some even fear that another version of the 2008 Lehman Brothers may be in the making. Major countries' financial policymakers are seen mapping out contingency plans against the Deutsche Bank woes.

For Korea, there is an urgent need to closely monitor the latest developments in Germany, which may trigger a massive job loss and spread to other financial firms. A close policy coordination is required among the Finance Ministry, the Bank of Korea and the Financial Supervisory Service.
(END)

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