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(News Focus) U.S. rate hike seen to impact S. Korea negatively

All News 11:36 June 15, 2017

By Kwak Young-sup

SEJONG, June 15 (Yonhap) -- The U.S. Federal Reserve's latest rate hike may impact the South Korean economy negatively by putting a damper on its recovering exports and domestic demand, the country's twin growth engines, analysts said Thursday.

As widely expected, the Fed hiked the federal funds rate by 0.25 percentage point Wednesday, raising the target range for the benchmark rate from 1 to 1.25 percent, a level that's on par with South Korea's. It marks the Fed's second rate hike this year following one in March.

Buoyed by growing demand from emerging markets, South Korea's exports have been on the mend in recent months, but the U.S. rate increase is feared to turn the tide by potentially making the economies shrink.

Pulling out of a prolonged decline, South Korea's overseas shipments staged a long-awaited rebound in the fourth quarter of 2016. In the October-December period, exports edged up 1.8 percent on-year to US$132.4 billion, a sharp turnaround from the 5 percent on-year drop posted three months earlier.

In May, exports jumped 13.4 percent on-year on strong overseas demand for chips and other key items, marking the seventh consecutive month of increase. Overseas shipments also rose at a double-digit rate for five months running.

In tandem with growing exports, South Korean companies started to spend more. The country's facility investment expanded 4.4 percent in the first quarter of this year from three months earlier, with construction investment gaining 6.8 percent.

On the back of resilient exports and investment, South Korea's gross domestic product gained 1.1 percent on-quarter in the January-March period, exceeding the 1-percent mark for the first time in six quarters.

(News Focus) U.S. rate hike seen to impact S. Korea negatively - 1

But the U.S. rate increase can act as drag on Asia's fourth-largest economy due to its possible negative impact on emerging countries, a major destination for South Korean goods.

South Korea usually benefits from a U.S. rate increase as it leads to a stronger greenback, which makes South Korean exports more competitive in overseas markets.

Market watchers, however, warned that a faster pace of U.S. rate hikes could dampen South Korean and other emerging economies by facilitating foreign capital outflows.

"The impact of the latest U.S. rate increase will likely begin to bite in a full-fledged way since the key rates in America and South Korea have now become equal," said Kim Jung-sik, who teaches in Yonsei University in Seoul.

"South Korean exports to the world's largest economy may rise, but such a possibility is not so high, given a recent downturn in shipments to the United States and Washington's growing trade pressure on Seoul," he said.

The U.S. rate hike is also forecast to cause South Korea's central bank face growing pressure to raise the country's benchmark interest rate, which could jack up consumers' debt-servicing costs.

Bank of Korea (BOK) Gov. Lee Ju-yeol recently hinted at the possibility of adjusting the current monetary policy position for the first time

"The BOK may take a monetary tightening approach if the economy shows signs of a robust recovery," Lee said in a speech marking the 67th anniversary of the BOK's founding. "As we may need to adjust our monetary easing stance in case economic conditions improve remarkably, we should thoroughly examine such a possibility."

Analysts said there little possibility of the BOK's immediate rate hike, but Lee's remarks are widely seen as signaling the central bank may consider a rate rise over the long haul.

(News Focus) U.S. rate hike seen to impact S. Korea negatively - 2

Any rate hikes would rise the financial burden of highly-indebted South Korean households, which may in turn crimp the country's private consumption showing signs of picking up, albeit at a slow clip.

In the first quarter of the year, South Korea's consumer spending grew 0.4 percent from three months earlier and 2 percent from a year ago.

The country's overall consumer sentiment hit the highest level in more than three years in May, helped by a rise in exports and expectations of the new government's economic policies. The composite consumer sentiment index for May came to 108.0, up from 101.2, a month earlier. A reading above 100 means optimists outnumber pessimists.

South Korea's household debt has been rising fact in recent years as people borrowed money from banks and other financial companies to buy homes, cover living costs and invest in real estate and businesses. The country's outstanding household credit -- which is composed of household loans and credit card spending -- came to 1,344 trillion won ($1.20 trillion) at the end of 2016, up 11.7 percent from a year earlier.

Dismissing such negative views, however, some analysts downplayed the impact of the U.S. rate hike on South Korea, saying it has long been anticipated.

"The U.S. rate rise will have little impact on South Korea and other emerging economies as it has been expected for months," said Kim Hyung-joo, a researcher at LG Economic Research Institute. "In case of Korea, it has already been reflected in market rates."

Yet watchers said America's rate increase will serve as a litmus test for South Korean President Moon Jae-in's economic team headed by Finance Minister Kim Dong-yeon, who doubles as the deputy prime minister for economic affairs and took office Monday.

The government has been pushing for an 11.2 trillion won extra budget plan in an effort to create jobs, President Moon's signature campaign promise, and fuel the recent recovery momentum in the economy.

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