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(LEAD) (News Focus) S. Korea raising alertness against influx of foreign capital

2013/09/24 15:41

By Kim Soo-yeon

SEOUL, Sept. 24 (Yonhap) -- South Korea has not been affected by recent bouts of emerging market turmoil, but it is keeping close tabs on cross-border capital inflows as a possible sudden reversal of such funds will serve as a destabilizing factor for its economy.

The government is raising its alertness against volatile capital movements as the Federal Reserve's recent surprise decision to postpone tapering its stimulus bond purchases is feared to accelerate foreign capital inflows, which could put upward pressure on the local currency.

"Cross-border fund inflows are positive in the short term, but over the long haul, they could serve as a destabilizing factor for the Korean economy," a senior government official said. "We are closely monitoring the situation with a sense of increased caution."

   Korea has differentiated itself from other emerging countries, including India and Indonesia, which have struggled to curb massive capital outflows and currency weakness as the Fed is mulling the timing of its stimulus cut.

Korea is highly sensitive to foreign capital flows as it underwent massive capital flights and subsequent currency depreciation whenever a financial crisis occurred. The won tumbled 25.7 percent against the U.S. dollar in 2008.

Since then, Korea has made efforts to raise shields against external shocks by boosting the foreign exchange reserve and drawing up a set of measures to curb excessive capital movements. The surplus run of the current account and a fall in short-term foreign debt are also serving as buffers against external funding risks.

Korea's stronger fundamentals helped prompt foreigners to chase Korean assets.

Foreign investors have snapped up Seoul stocks with their combined net buying reaching around 8.3 trillion won (US$7.9 billion) since Aug. 23.

The local currency has inched down 0.3 percent to the greenback so far this year, but the won has gained around 3.7 percent against the dollar since mid-May. The Korean currency ended at 1,072.20 to the greenback on Tuesday, up 1.6 won from Monday, and the strongest in eight months.

But Korea, a small and open economy, must brace for rainy days as possible excessive inflows of such funds could quickly exit the market if external conditions change, experts say.

"Prior to the Fed's meeting, foreign funds escaping from other emerging markets had made their way to the Korean market. Now, the Fed's decision eased investors' appetite for safe assets," said Jeon Seung-ji, a currency analyst at Samsung Futures Co.

She said that the Korean won is likely to be under upward pressure from foreign stock funds, but the pace of the won's strength will likely slow toward year-end amid caution against market intervention by authorities.

The government, the central bank and the financial watchdog said in a joint statement on Sunday that their focus on market monitoring will be placed on both capital inflows and outflows.

The finance ministry earlier in the day at a meeting with local exporters and importers expressed concerns about currency volatility that could be spurred by herd behaviors in the market.

"Authorities should be further watchful against capital flows, given the pace of capital inflows and their size," said Jeong Young-sik, an economist at the Samsung Economic Research Institute.

He said that it may not be the time to strengthen the so-called macroprudential measures for now, but the government should boost its line of defense, including bolstering regional currency swap lines.

Since 2010, South Korea has implemented three measures to curb excessive foreign capital flows, including regulations on banks' foreign exchange forward positions and levies on banks' non-core foreign liabilities.

Korea posted a current account surplus for the 18th straight month in July and the short-term external debt declined to $119.6 billion as of end-June, the lowest in over six years. Its FX reserves reached $331.09 billion as of end-August.

sooyeon@yna.co.kr

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