South Korea not worried about capital outflows for the time being: finance minister

South Korea’s finance minister has brushed off the short-term risks of capital outflows from the Asian economy as gaps in global interest rates widen.

SeongJoon Cho | Bloomberg | Getty Images

South Korea’s finance minister has brushed off the short-term risks of capital outflows from the Asian economy as gaps in global interest rates widen.

Speaking to CNBC at the Group of 20 meeting in Bali, Choo Kyung-ho said capital outflows from a country do not occur as a result of a single economic engine – such as interest rate differentials – because investors are also influenced by other factors, such as the strength of a economy.

Choo, who is also the country’s deputy prime minister, acknowledged concerns that the US is moving towards more aggressive rate hikes, and that the widening interest rate gap could trigger a capital outflow from South Korea.

“The interest rate gap has happened a few times, but we haven’t experienced a major capital outflow,” he said Friday, according to CNBC’s translation. “Based on that, I think capital outflows don’t just happen because of a rate differential.”

Capital outflows occur when assets and money leave one country for another because of better investment returns, such as higher interest rates.

In June, the US Federal Reserve raised its benchmark rate by 75 basis points, the most aggressive rate hike since 1994.

The US Federal Reserve is poised to roll out another major rate hike at its upcoming meeting in July, with some traders betting last week a rise of as much as 100 basis points after US consumer inflation hit a 40-year high of 9 reached .1%.

Fundamentals are the key

“The most important things are the fundamentals of an economy, whether the economy can demonstrate reliability to the markets. These are the factors that move capital,” Choo told CNBC’s Martin Soong.

However, the South Korean finance minister said the Fed’s aggressive rate hikes – an attempt to curb inflation – are still a cause for concern. The growing difference in borrowing costs between the US and South Korea could accelerate capital flows between the two countries in the long run, he added.

… I’m not worried about a dramatic capital outflow.

Choo Kyung-ho

Finance Minister of South Korea

Recent capital inflows into the South Korean economy, particularly government bond markets, have also helped to ease concerns about outbound capital flight, Choo added.

“South Korea’s economy is experiencing a smaller moderation compared to the global economy. And it’s still on a recovery path,” he said.

“That’s why I’m not worried about a dramatic capital outflow.”

Last week, the Bank of Korea acknowledged risks to capital outflows when it achieved a historic half-point hike in interest rates in an attempt to rein in rising prices as inflation reached its fastest pace in 24 years.

Concerns about capital outflows, or capital flight, are beginning to arise as central banks worldwide race to raise interest rates in an effort to curb rising inflation.

The difference in interest rates between markets – especially as some markets like the US favor more aggressive rate hikes – could drive money flows as investors look for better returns.

Past capital flight incidents have included money movements that responded to US quantitative easing measures following the subprime crisis, including increased liquidity and lower interest rates.

The weakening US dollar forced capital into other markets, such as the emerging economies in Asia, increasing inflationary pressures and causing currencies in those markets to appreciate.

Warm money flows in Asia?

Economists have begun to warn about this round of hot money flows.

Analysts at Mizuho Bank said in a note last week that there were concerns about capital outflows from India, especially as the US is actively raising interest rates and weaknesses appear in the Indian economy.

India posted a record trade deficit of $25.6 billion in June as imports of crude oil and coal surged.

“This will exacerbate volatile capital outflows at a time when the US Fed is already committed to aggressive rate hikes, implying greater depreciation pressure from the INR,” said analysts Vishnu Varathan, Lavanya Venkateswaran and Tan Boon Heng.

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“The Reserve Bank of India, well aware of this predicament, is bracing for further rate hikes.”

Thailand may also consider more rate hikes to keep pace with Fed rate hikes amid a depreciating Thai baht that “threatened to exacerbate imported inflation and exacerbate capital outflows in an unfavorable feedback loop,” analysts said.

The Chinese economy could also face increased pressure on capital outflows from US interest rate hikes, although China’s own dampened economy was the most likely driver of cash flows, Larry Hu, chief economist for the Macquarie Group in China, said last week. month in a note.

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