Fed taper likely to have 'limited' impact on Korean economy: gov't

SEOUL/SEJONG, Dec. 19 (Yonhap) -- South Korea said Thursday that the U.S. Federal Reserve's monetary stimulus tapering is likely to have a "limited" impact on South Korea as it can be seen as a signal of confidence in the world's largest economy.

The finance ministry, the central bank and other financial authorities said it could rather serve as a positive factor as the Fed's decision would lift uncertainty that has been hovering over the financial market for months.

After a two-day policy meeting, the Fed announced on Wednesday (Washington time) that it would begin reducing bond purchases by US$10 billion per month starting in January, citing a stronger job market.

The Fed has operated an $85 billion monthly bond-buying program in a bid to boost the U.S. economy by keeping interest rates low. Market watchers worried that the exit from such expansionary monetary policy could prompt capital exodus from emerging markets including South Korea, causing financial market instability in the process.

"In the short term, this could result in increased volatility in financial and foreign currency markets," Finance Minister Hyun Oh-seok told a meeting with other policymakers in Seoul. "But the impact would be limited given our healthy economic fundamentals."

Another government official echoed the opinion.

"It seems that the focus (of the Fed's move) should be on reducing uncertainty as the scale of the tapering remained in the range that the market has expected," the official said on condition of anonymity. "This rather indicates that the U.S. economy stays on track to a recovery."

The Fed's action did not affect South Korea's sovereign credit default risks. The credit default swap (CDS) premium for South Korean state bonds dropped 1 basis point to 55 basis points on Thursday from the previous day.

The spread reflects the cost of hedging credit risks on corporate or sovereign debt, with a rise implying a deterioration in the credit of government bonds and higher costs for issuance. A basis point is 0.01 percentage point.

Many market watchers said that it is overblown to worry that the Fed's tapering would result in the worst-case scenario in South Korea where capital flows out in droves, exchange rates soar, interest rates jump and the real economy tumbles.

They cautiously worried, however, that a tumble in emerging countries could mean trouble for South Korea, which has a small and open financial market and depends heavily on exports for its economic growth.

"An instability in emerging countries could have a negative impact on our economy," said Lim Hee-jung, a senior economist at the Hyundai Research Institute. "The chances are slim that a crisis develops into a full-blown one, but we cannot rule out the possibility."

The government also remained on alert against any possible fallout from the Fed's decision. It was to convene a meeting soon of relevant ministries and agencies to monitor the market.

Separately, the finance ministry and the Bank of Korea (BOK) held meetings to discuss the impact of the tapering on the Korean economy and financial market.

"The Fed's decision could have both positive and negative impacts on the global economy. The positive side is that the U.S. economy is recovering and that uncertainty over the tapering is being lifted, and the negative side is that there is a possibility that the pressure on capital outflows from emerging markets could be mounting," the finance ministry said in a press release after the meeting.

"In case the market shows any signs of instability, we will swiftly respond with our contingency plans to prevent volatility in the financial and foreign currency markets from spilling over into other areas," it added.

The central bank shared similar views.

"Financial markets in the U.S. and Europe have reacted relatively calm, with the yields (to U.S. Treasurys) inching up and stock markets jumping," said BOK's senior deputy governor, Park Won-shik, who presided over the meeting.

"This can be interpreted as evidence that the market sees the scale of the tapering has not exceeded much from what it expected and that the move resulted in lifting the overall market uncertainty over tapering," Park added.

He, however, worried that uncertainty still lingers over how the financial market situations will unfold going forward, saying that the BOK will "closely" monitor the financial and foreign currency markets "with a great amount of caution.

"If necessary, we will draw up appropriate market stabilization measures through close consultations with the government," he said.

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