With U.S. interest rates soon expected to enter an upcycle from the current near-zero levels, emerging markets have already seen a sizable outflow of global capital, with Korea being among the most affected, recent data shows.

Yet, local financial authorities and some economists are playing down the probability of a massive capital flight from Korea, citing a moderate pace expected in the U.S. monetary tightening and Korea’s relatively sound economic fundamentals.

“Even if the U.S. Federal Reserve raises the interest rates, its impact on Korea in terms of capital flows will be limited,” said Bank of Korea Gov. Lee Ju-yeol last week, adding that the country has a contingency plan in place, even if he turns out to be wrong.

“The impact on Korea will not be the same as that on some of the more vulnerable, newly-emerging economies, because of its economic fundamentals and foreign-currency reserves,” he said. Korea’s foreign exchange reserves stand at over $368 billion in November.

Higher interest rates in the U.S. -- with the first hike expected at this week’s Fed meeting -- will lure global investors back to the country, prompting a reversal of capital flows from emerging markets to the U.S. 

Since the financial crisis, global investors gobbled up emerging-market assets, particularly fixed income assets, in the face of rock-bottom interest rates in the U.S.

Korea is estimated to have received $163 billion in foreign investment since 2009, according to the central bank. 

“Korea do have a quite lot of foreign money that could be pulled out of the country, but the country’s improved foreign-debt portfolio, the annual current account surplus of over $100 billion and ample forex reserves should provide a buffer,” Lee Chang-seon, economist at LG Economic Research Institute, wrote in a report.

A more worrisome scenario, he continued, is a potential global economic turmoil stemming from markets more vulnerable to the U.S. rate increases, coupled with a hard-landing in China.

“That will worsen global investor sentiment and spark flight to safety, negatively affecting Korean stocks and currency,” he wrote.

Foreign money has been flowing out of Korea and other emerging markets from some time now.   

According to the Institute for International Finance, global portfolio outflows from emerging markets came in at $33.8 billion during the third quarter, the largest since the financial crisis.

The amount is far smaller than $119.4 billion reported in the fourth quarter of 2008 when global investors dumped emerging-market assets in a panic-led flight to safety.

The IIF, however, noted that this was the first time since the crisis that net-selling continued for three consecutive months.

Sunday’s data puts Korea on top of the list of markets most affected, with withdrawal of $10.9 billion reported during the July-September period. Of this, the stock market accounted for $7.6 billion, while the rest is from the bond market.

The list excludes China and the Philippines due to the lack of data. China, in June, had reported $11-billion outflow of foreign portfolio investment.

Another external factor weighing on Korea’s financial markets, although not as heavily as the U.S. monetary policy change, is the falling oil prices and their impact on oil dollars. Crude oil prices fell to a near seven-year low last week -- an addition to global economic uncertainties and another reason for investors to seek safer assets.

According to the Financial Supervisory Service on Sunday, Saudi Arabia is by far the biggest net-seller of Korean stocks in October, dumping 1.8 trillion won ($1.52 billion) worth of shares. Saudi Arabian investors continued a selling spree for five months since June. Their net selling is estimated at around 3 trillion won so far.

Saudi Arabian investors hold 2.83 percent of total Korean stocks at the end of October.

By Lee Sun-young (milaya@herald.corp.com)