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(News Focus) U.S. rate hike feared to hit S. Korea's economy

All Headlines 11:20 December 15, 2016

By Lee Chi-dong

SEOUL, Dec. 15 (Yonhap) -- The U.S. key interest rate hike is expected to weigh on the South Korean economy, which is already facing a slew of challenges at home and abroad, experts said Thursday.

The Federal Reserve raised the rate by 0.25 percentage points to a range of 0.5-0.75 percent.

The decision was widely expected and all eyes are riveted on the pace of the following steps. The Fed has hinted at the possibility of a few more rate hikes in the coming year.

(News Focus) U.S. rate hike feared to hit S. Korea's economy - 1

"There is an outlook that it will be faster than expected," Bank of Korea (BOK) Gov. Lee Ju-yeol told reporters. "(We) will monitor the situation."

A speedy increase in the U.S. benchmark interest rate would directly affect South Korea's financial market.

Data show that a rise of 0.25 percentage point in the one-year U.S. Treasury yield leads to the outflow of 3 trillion won (US$2.5 billion) in foreign equity investment here in three months, according to Korea Institute for International Economic Policy.

An image of foreign capital in this undated file photo provided by Yonhap News TV. (Yonhap)

When the U.S. jacked up the rate in December last year, South Korea saw a net outflow of 6.3 trillion won over the following three months.

Many predict that U.S. President-elect Donald Trump's aggressive fiscal strategy may further drive up market interest rates.

As U.S. and other global bond yields have jumped since Trump's election, a net 2.98 trillion won of foreign capital flew out of South Korea last month alone, according to the Financial Supervisory Service.

It puts the central bank of Asia's fourth-biggest economy in a dilemma.

With its policy rate standing at the record low of 1.25 percent, the BOK is under pressure to cut it once again. But the U.S. move narrows room for its maneuvering.

(News Focus) U.S. rate hike feared to hit S. Korea's economy - 3

It's also difficult to raise the rate, given a mountain of household debt totaling more than 1,300 trillion won.

The central bank froze the rate in its monthly monetary policy meeting held earlier Thursday.

"Rather than the entire volume of the household debt, a growth in loans extended to families with no debt payment capability amid a protracted economic slowdown is a problem," Sung Tae-yoon, a professor at Yonsei University, said. "Policy is needed to lower the interest rate burden for borrowers with low income and credit."

Meanwhile, a mixed impact is expected for South Korea's exports from the upward trend of the U.S. rate.

A stronger dollar would help South Korean firms enhance their price competitiveness. The full-scale recovery of the U.S. economy will also support exports under the bilateral free trade agreement.

(News Focus) U.S. rate hike feared to hit S. Korea's economy - 4

On the other hand, South Korea's exports, which have shown some early signs of a much-awaited recovery, may feel the pinch from a drawn-out slump in other emerging economies if they suffer financial setbacks from the U.S. rate trend.

Outbound shipments to China and other emerging economies account for 57.5 percent of South Korea's total exports.

Exports grew 2.7 percent in November on-year after falling for the two previous months.

"Currently, the local economy is confronted with surging household debt, the possibility of a sudden slump in the real estate market, corporate restructuring and other risk factors," Kim Cheon-koo, a researcher at the Hyundai Research Institute, pointed out. "If the domestic economic risks are combined with the U.S. benchmark interest rate hike, it could have more impact than in the past."


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