South Korea not worried about capital outflows for now: finance minister

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

Speaking to CNBC at the G20 meeting in Bali, Choo Kyung-ho said capital outflows from a country are not the result of a single economic driver – such as interest rate gaps – as investors are also influenced by other factors, such as strength an economy.

Choo, who is also the country’s deputy prime minister, acknowledged there are concerns that the US may be heading for more aggressive interest rate hikes and that the widening interest rate gap could trigger capital outflows from South Korea.

“The interest rate gap has happened a few times before, but we haven’t seen any major capital outflows,” he said on Friday, according to CNBC translation. “Based on that, I don’t think capital outflows are happening simply because of an interest rate differential.”

Capital outflows occur when assets and money are lost due to better investment returns, such as B. higher interest rates, move from one country to another country.

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

The US Federal Reserve is poised for another big rate hike at its upcoming July meeting, with some traders betting on a hike of as much as 100 basis points last week after US consumer inflation hit a 40-year high of 9.1 % had reached.

Basics are key

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

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

… I’m not afraid of dramatic capital outflows.

Chou Kyung-ho

Finance Minister of South Korea

Recent capital inflows into the South Korean economy, particularly Treasury markets, have also helped allay concerns about capital flight overseas, Choo added.

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

“That’s why I don’t fear any dramatic capital outflows.”

Last week, the Bank of Korea acknowledged that there were risks of capital outflows on delivery a historic half-point rate hike to curb rising prices as inflation surged to a 24-year high.

Concerns about capital outflows or capital flight are surfacing as central banks around the world seek to raise interest rates to curb rising inflation.

Interest rate differentials across markets — particularly some markets like the US, which favor more aggressive rate hikes — can create hot cash flows as investors seek better yields.

Past instances of capital flight include money movements in response to post-WWII US quantitative easing measures subprime crisiswhich included increased liquidity and lower interest rates.

The weakening of the US dollar forced capital into other markets such as emerging Asia, adding to inflationary pressures and strengthening the currencies of those markets.

Hot cash outflows in Asia?

Economists have started warning about this round of hot money flows.

Analysts at Mizuho Bank said in a note last week there are concerns about capital outflows from India, particularly as the US actively hikes interest rates and weaknesses emerge in India’s economy.

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

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

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

Thailand, too, may consider further rate hikes to keep pace with Fed rate hikes as the Thai baht weakens, which “has threatened to worsen imported inflation and exacerbate capital outflows in a negative feedback loop,” the analysts said.

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

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