World Economy

US Rate Hike Threat to South Korea Economy

US Rate Hike Threat to South Korea EconomyUS Rate Hike Threat to South Korea Economy

Concerns are growing over the negative effects that the US’ coming interest rate hike could have on the South Korean economy, while some local analysts have downplayed the possibility that the dollar would hold a stronger position against major currencies and investors would actively withdraw from Asia, Yonhap reported.

Some economists cited the US Federal Open Market Committee’s tight monetary policy later this year and economic slowdowns in the US and China as factors that could undermine the Korean economy. Among other factors were the global currency war involving Japan’s record-weak yen, Greece’s possible exit from the eurozone and budding woes in emerging economies.

Korea Institute of Finance economist Rim Jin was quoted by a news provider as saying that “should the US benchmark rate climb, Korea’s rate could rise. Under the scenario, Korea will face the situation that households have a bigger burden of payment of their financial debt.”

  Currency Crisis

An economist from Hyundai Economic Research Institute said Korea may be wary of foreign investments’ massive outflow after the US rate hike. “The raise may trigger a currency crisis of some emerging countries such as Venezuela and Ukraine,” he said.

Their worries are based upon the projection that global funds investing in emerging economies and Korea will relocate their stance to the US market, seeking high returns on the possibly rising value of the greenback.

In contrast, Hana Daetoo Securities senior researcher Park Moon-hwan said the strong dollar would be a temporary trend. During his outlook presentation on a finance TV program, he said it would be difficult for the US to continuously raise rates after an expected hike this year.

Saying that a hike for once has already been sufficiently reflected in the market, Park stressed the barometer for the dollar’s future value is the volume of new banknote circulation in the market according to the recovery pace.

Though the FOMC actively printed banknotes on a quantitative easing policy after the 2008-09 subprime mortgage crisis, a great portion of the new bills were allegedly held by the FOMC and banks amid sluggish cash demand from the market.

Meanwhile, the Finance Ministry of Korea is reportedly considering lowering its 2015 GDP growth target by about 0.5 percentage point from its earlier forecast of 3.8 percent, according to some government officials.

While the ministry plans to unveil its second-quarter policy directions in late June, it will take negative factors including sagging exports and external uncertainties into consideration.

  Low Oil Prices

Low oil prices are contributing to a slowdown in the US metals industry, the Interior Department’s Geological Survey said, Bloomberg reported.

The US primary metals six-month leading index was negative 4.3 in April, the fifth consecutive month below zero, the USGS said in a report on its website. Oil prices have dropped 41 percent in the past year while the London Metal Exchange index of six industrial metals including copper and zinc declined 14 percent over the same period.

“Low oil prices have reduced spending on unconventional oil and natural gas development construction projects and weak new orders for manufactured goods will lead to slower plant construction activity,” the USGS said. “The negative primary metals leading index growth rate indicates that activity in metals industry activity is likely to slow further in the near term.”

Construction is the biggest driver of demand for copper, used in wiring and pipes, according to the New York-based Copper Development Association. Nonresidential activity accounts for two-thirds of construction spending, the USGS said.