Foreign exodus from Korea third largest in Asia, geopolitical risks add to scare

Nearly $2 billion in foreign capital has been pulled out of the South Korean stock markets last month, third largest after Japan and Taiwan, to underscore rising doubts about the Korean economy heavily reliant on global commerce and laden with overwhelming debt on top of geopolitical risk with North Korea renewing missile launches of all sorts.

Foreign investors have taken out $1.9 billion from Korean stocks in September, the third largest after Japan and Taiwan, comparative study by Bloomberg showed.

The flight would likely continue due to widening difference in base rates between the United States and Korea and geopolitical tensions building up in the Korean peninsula. Korea also has the largest household debt versus gross domestic product among major countries in Asia which makes it harder for the Korean central bank to match aggressive U.S. pace in rate hikes.

Escalating tension in the Korean peninsula led by North Korea’s missile launch over Japan on Tuesday is another factor adding to economic risk.

A global economic slowdown bodes badly to Korea that is highly reliant on exports and its stock market. In September, the benchmark Kospi fell 10.8 percent.

The Korean market is also led by mainstay chip stocks, which face a slew of uncertainties from the U.S. Inflation Reduction Act to record inventories from subdued demand.

Market watchers project global economic slowdown will affect memory and fabless and electronics component sectors – more than foundry and post processing areas.

Outsized private-sector debt adds to the risk in Korean economy and assets.

Maeil Business Newspaper analyzed economic vulnerability in 24 Asian countries based on International Monetary Fund’s 8 crisis alert indicators with Korea Economic Research Institute. Of the indicators, external payment capability shows external soundness of a country in strong dollar environment.

Korea remains strong in terms of this capability given low short-term foreign debt ratio.

Korea’s short-term foreign debt ratio – the ratio of external debt that should paid in short term versus foreign reserves – reached 38.2 percent, which is lower than the IMF risk level of more than 100 percent and Asian countries’ average of 125.7 percent.

Insolvent loans also accounted for 0.17 percent of entire bank loans. The weak won has led to increase in capital flight, but authorities and experts are in agreement that the country is not in a danger of a crisis in the scope of late 1997. Korea had to turn to international bailout in the wake of Asian currency crisis in 1997 due to lack of foreign exchange reserves and high short-term foreign debt.

Although in less danger of a default and liquidity crisis, how much Korea will be able to earn from now could be important in preventing further foreign capital flight.

Korea’s current account ratio as to GDP is projected at 2.18 percent in 2022, which isn’t above the IMF crisis level but can still pose a concern.

“Korea should strengthen its export competitiveness to build up basic fundamentals that help prevent economic crisis,” said Choo Kwang-ho, head of economic division at Federation of Korean Industries.

Containing debt and inflation are other challenges.

Consumer prices in Korea added 6.0 percent on average in the past three months, which is higher than 5 percent IMF level. Government debt ratio of 52.0 percent and private debt 173.6 percent as to GDP also crossed the IMF threshold. Rising debt may be a threat to real economy as the BOK is pressured to raise interest rates to prevent capital outflow and won depreciation to match the pace with U.S. Fed.

Household debt, which accounts for a majority of private sector debt – reached a record 1,869.4 trillion won in the second quarter, up 6.4 trillion won from the previous quarter.

The rises in interest rate also have been straining the corporate sector.

According to a survey conducted by FKI on 1,000 manufacturing companies, when the base rate adds another 25 basis points from current level, half of the companies could become marginal unable to afford debt financing cost through earnings.

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