- Inflation in June at the highest level since the 1990s Asian financial crisis
- In June, foreign exchange reserves fell the most since late 2008
- Stress builds on the new government having to act quickly
- Markets are calming down amid no signs of a homegrown crisis
SEOUL, July 5 (R) – South Korea’s inflation last month hit its highest level since the Asian financial crisis more than two decades ago, adding to signs of mounting strain on its open, trade-dependent economy and expectations of a large rate hike by the central bank .
Data showed on Tuesday that the consumer price index rose slightly faster-than-expected in June from a year earlier – the highest since November 1998 – while other data showed that foreign exchange reserves fell the most since late 2008.
Economists and market experts ruled out the imminent danger of Asia’s fourth-largest economy falling into a crisis as it has on several occasions in the past thanks to significant improvements in the international balance of payments and debt profile.
However, some warned that the government and central bank are facing a difficult time.
“Policy-making becomes all the more difficult as they have a mix of upside inflation risks and downside risks to economic growth for now,” said Park Seok-gil, an analyst at JPMorgan Chase Bank.
High inflation underpinned the case for the central bank raising interest rates by an unprecedented 50 basis points at next week’s meeting.
South Korea’s vulnerability to external shocks, given its heavy reliance on foreign trade and cross-border capital flows, has meant it has come under pressure, with rising outflows from the local stock market and the falling value of the won.
Amidst the strain, the credit default swap premium on the country’s five-year global government bonds has risen 30.57 basis points to 52.54 year-to-date, the highest since the onset of the COVID-19 pandemic in early 2020.
Local financial markets showed no signs of panic on Tuesday, assuming the troubles the country is facing are mostly from abroad and a global trend. The stock, bond and currency markets all posted small gains.
Still, pressure is building on the government of conservative President Yoon Seok-yeol, who took office just two months ago and is yet to come up with a comprehensive policy outline on how to differentiate himself from his liberal predecessor.
President Yoon has ordered public sector reform, calls for idle asset sell-offs and spending cuts, and promises he will chair an emergency session on the economy each week. Continue reading
Since Yoon took office, the central bank has sold dollars to tame the won’s plunge to its weakest level since the 2008-2009 global financial crisis, unsettling investors while dealing with continued capital outflows from the stock market.
The Bank of Korea said Tuesday it sold some of its foreign exchange reserves for a fourth straight month in June to “reduce volatility in the foreign exchange market,” a term used to describe its intervention.
It didn’t disclose how much it sold, but the intervention, coupled with the dollar’s appreciation against the other major currencies, caused the dollar value of its foreign exchange reserves to shrink by $9.43 billion in June.
Currency traders shrugged off the fall in foreign exchange reserves, saying it was largely expected and also due to changes in the dollar’s value, while warning that further sharp and disorderly changes could be problematic.
South Korea’s foreign reserves ranked ninth in the world at the end of May, at $438.28 billion, enough to cover more than seven months of imports based on the monthly average amount for this year.
Reporting by Cynthia Kim, Jihoon Lee, Choonsik Yoo; Edited by Kim Coghill and Lincoln Feast.
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