Frozen key rate feared to accelerate foreign capital outflow in Korea

The Korea Times

The Korea Times

Finance

Tue, September 26, 2023 | 09:15

Markets

Frozen key rate feared to accelerate foreign capital outflow in Korea

Posted : 2023-02-23 15:51

Updated : 2023-02-23 18:15

Korea's financial district on Yeouido in Seoul / gettyimagesbank

By Lee Min-hyung

The Bank of Korea's (BOK's) decision to freeze the key rate is feared to trigger a foreign capital outflow amid a widening interest rate gap between the United States and Korea.

The decision came in reflection of deepening recession woes in the economy due to falling exports and weakening GDP growth here.

But of particular concern is the interest rate gap between the two countries which may widen further over the next couple of months. For now, the gap is at 1.25 percentage points, but it may expand to a historic high of 1.75 percentage points if the U.S. Federal Reserve increases its rate by 25 basis points twice in March and April.

Rate freeze does not mean end of tightening cycle: BOK governor

2023-02-23 16:55 | Economy

This may prompt more foreign capital outflow in the local stock and bond market. The won-dollar exchange rate is also feared to show signs of fluctuation once again after a recent stabilization.

Reflecting on such woes, the Korean won lost ground against the dollar overnight, closing at over 1,300 won per dollar Wednesday for the first time since Dec. 19. It fell to this year's low of 1,227 won per dollar on Feb. 2, but has since displayed an upward trajectory on the different monetary gestures between the BOK and Fed.

Data also showed that foreign investors are on a selling spree of local bonds. Foreigners sold bonds here worth more than 6.5 trillion won in January alone, the most since 2000 when the BOK started compiling relevant data.

The stock market seemed to be less concerned about foreign capital outflow, as foreign investors purchased Korean stocks worth 6.14 trillion won last month according to data from the Financial Supervisory Service.

But they are reducing their net buying of local shares this month. For five trading days last week, foreign investors purchased KOSPI-listed shares worth merely 48.5 billion won. This is a drastic fall from a week earlier when the figure marked 420.1 billion won, according to the Korea Exchange.

Market analysts said the movement of the won-dollar exchange rate will determine how seriously the local capital market will be hit by foreigners' weakening investment here.

"Foreign investors have recently shown signs of weakening their stock buying not just in Korea but also in other Asian markets such as China and Taiwan," Hi Investment & Securities analyst Park Sang-hyun said. "This was attributable to a dwindling expectation for the Fed to end its rate hike cycle and the dollar's rebound."

mhlee@koreatimes.co.kr