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BOK says growing financial 'interconnection' could cause instability

All News 17:48 January 04, 2017

SEOUL, Jan. 4 (Yonhap) -- South Korea's central bank on Wednesday expressed concerns that the country's growing "interconnection" with global financial markets could increase instability in domestic markets.

Given that local stock markets are more affected by foreign investors, their moves are a key factor to stability of the local financial market.

Foreign investment in local stocks soared to US$551.9 billion at the end of 2015, accounting for 40.1 percent of the nominal gross domestic product, compared to a mere $80.3 billion, or 14.3 percent of the nominal GDP, at end-2000, the Bank of Korea (BOK) said in a report released on Wednesday.

GDP, the broadest measure of an economy's performance, is the total value of goods and services produced within the economy in a given period.

The BOK said deepening interconnection between local and foreign financial markets could help improve efficiency in the local markets and contribute to economic development in the medium to long term. However at the same time, the central bank said "foreign capital inflows and outflows could cause volatility" in the financial market.

It also cautioned that sudden foreign capital moves could undermine relevance between the financial sector and the real economy sector, noting South Korea and other emerging Asian markets saw their stock markets and interest rates affected by global financial situations, regardless of their respective real economies.

The BOK stressed the importance of putting in place countermeasures to cope with any drastic volatility of foreign capital moves to maximize benefits of foreign capital investment.

South Korea, a small open economy, heavily depends on exports for its growth.

BOK says growing financial 'interconnection' could cause instability - 1


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