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Deepening Uncertainties in South Korea’s Economy

The South Korean economy is expected to face an extended period of turbulence in its markets following a spike in the benchmark US Treasury yield. The likely mix of elevated interest rates and an economic slump is now feared to hit Korean companies, individuals and the government.

The yield on the benchmark 10-year Treasury briefly surpassed 5 percent for the first time in 16 years on Thursday, sparking concerns that its ripple effect could be considerable across various sectors, including not only US mortgages but also interest rates and exchange rates across the world.

The rise in US Treasury yield was driven by US Federal Reserve Chair Jerome Powell’s comments on high inflation and monetary tightening. “Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said.

The Fed chief noted the initial easing in prices was not enough to confirm a trend. “We cannot yet know how long these lower readings will persist, or where inflation will settle over coming quarters,” he added.

Powell’s concerns about continued inflation indicate that the US Fed is likely to maintain higher interest rates for an extended period to rein in inflation. In addition to this expectation about the Fed’s stance, higher oil prices and the US government’s debt issuance to cover its deficit spending reportedly have spooked investors and fed inflation fears.

The latest development is set to affect a wide range of sectors. In the US, experts warn the impact will soon hit mortgages and student loans, among other things. Given that the 10-year yield of the US Treasury is widely perceived as a barometer for interest rates, the increase to a level flirting with 5 percent could have significant economic repercussions.

When US government bonds offer higher yields, investors tend to lose appetite for stocks and other risky assets. As expected, US stocks fell for the fourth straight day Friday, as investors saw more incentives in bonds.

For the Korean economy, the knock-on effect could be comprehensive and potentially painful. Not only the local stock market, but also the value of the Korean currency against the US dollar could confront more disruptive sessions in the coming weeks, if not months.

On Thursday, the Bank of Korea left its key interest rate unchanged at 3.5 percent for the sixth straight time since February this year, taking into account lingering uncertainties related to sluggish growth and rising household debts. The continued rate freezes came in the wake of seven consecutive rate hikes from the BOK from April 2022 to January 2023.

After the BOK maintained the rate again Thursday, Bank of Korea Gov. Rhee Chang-yong said that interest rates would not be cut to the 1 percent level as had been done before. Rhee’s remark was interpreted as a warning that people should refrain from property investment beyond their capacity. Experts continue to point out the higher risks of snowballing household debt, which is projected to reach 1,877 trillion won ($1.39 trillion) in the third quarter of this year.

The broader picture for the Korean economy is gloomy at best. The BOK slashed Korea’s growth projection to 1.4 percent in May. And exports fell for 12 straight months in September, hurt by slower demand for semiconductors, a key export item of Korea, as well as the protracted slump in exports to China, the country’s biggest trading partner.

Oil prices and the Korean currency are expected to remain unstable in the coming quarters as the global economy now has to deal with the drawn-out Ukraine-Russia conflict as well as the war between Israel and Hamas.

Against this backdrop, financial policymakers must adjust and coordinate policies on high interest rates, restrictions on loans, exchange rates and household debts, bracing themselves for more shocks in the markets.

Source : ANN

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