The government said it is worried about cheap credit in the U.S. destabilizing the local economy as large funds into the region could worsen inflationary pressure.

“The U.S. Federal Reserve’s pledge to maintain zero interest rate policy in the medium term could destabilize other economies even if they didn’t intend it,” Choi Jong-ku, deputy minister for international affairs of the Finance Ministry, told reporters. 

In a news conference for foreign press correspondents, Choi expressed concerns about renewed inflows of capital on government bonds.

“The two biggest risks to the Korean economy, as seen in 2008 financial downturn, are its short-term external debt and volatile capital movements. Those risks are still there, and the capital is moving to the government bond market due to market uncertainties,” he said.

But Choi played down talk of additional capital control measures aimed at curbing foreign capital flowing into bonds denominated in the won.

Korea, along with its regional peers with relatively higher benchmark interest rates, is seen as vulnerable to volatile capital movements as cheap funds chasing high returns could enter and exit fast at the slightest sign of economic uncertainty.

Emerging market economies have attracted a large amount of investments in stocks and bonds from the U.S. and Europe, boosting inflation in the region.

Choi emphasized that Korea’s strong fiscal balance, diverse trading partners and ample foreign exchange reserves would keep the economy from being heavily impacted by the current debt woes in the U.S. and Europe.

“The Korean economy has enough policy room to cope with global uncertainties. Korea’s external debt structure is in a much better shape, and foreign currency liquidity remains at a healthy level," Choi said.

He also cited the latest analysis by the International Monetary Fund to emphasize the economy’s resilience, saying “(IMF) noted that even if a double-dip were to hit, our economy will be able to avoid major shocks.”

The Bank of Korea, holder of the world’s seventh-biggest foreign exchange reserves, has $311.03 billion on the side to protect the local currency against sharp volatilities.

The U.S. Federal Reserve Chairman Ben Bernanke on Tuesday night local time said he plans to hold the interest rate near zero until at least mid-2013.

But more investors around the world are interpreting the signal as a deterioration of outlook in the world’s most powerful economy, sparked by the historic cut of the U.S. debt rating by Standard & Poor’s from “AAA” to “AA+” over the weekend.


By Cynthia J. Kim
(cynthiak@heraldcorp.com)