Data showed on Tuesday the consumer price
index grew a slightly faster-than-expected 6.0% in June over a year earlier –
the highest since November 1998 – while other data showed foreign exchange
reserves shrank by the most since late 2008.
Economists and market experts dismissed any
immediate risk of Asia’s fourth-largest economy falling into a crisis as it has
several times in the past, thanks to significant improvements in its
international balance of payment and debt profile.
But some warned the government and central
bank were facing a difficult period.
“Policymaking will become all the more
difficult as they have a mix of upside inflation risks and downside economic
growth risks continuing for the time being,” said Park Seok-gil, an
analyst at JPMorgan Chase Bank.
The high inflation reading did reinforce
the case for the central bank’s increase of the policy interest rate by
unprecedented 50 basis points at its meeting next week.
South Korea’s vulnerability to external
shocks, given its heavy reliance on foreign trade and cross-border capital
flows, has seen it come under pressure with rising fund outflows from the local
stock market and the falling value of the won.
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Reflecting the strain, the credit default
swap premium on the country’s five-year global sovereign bonds has shot up
30.57 basis points this year to date to 52.54, the highest since the early days
of COVID-19 pandemic in early 2020.
Local financial markets showed no sign of
panicking on Tuesday, with the perception that problems facing the country were
mostly from abroad and a global trend. Stock, bond and currency markets all
posted small gains.
Still, pressure is building over the
government of conservative President Yoon Seok-yeol, who started work just two
months ago and has yet to provide a broad policy blueprint on how to make a
difference from his liberal predecessor.
President Yoon has ordered a reform of the
public sector, calling for sell-off of idle assets and savings in expenditure,
while promising that he would preside over an emergency meeting on the economy
Since Yoon took office, the central bank
has been selling dollars to tame the won currency’s plunge to the weakest since
the 2008-2009 global financial crisis from unnerving investors while at the
same time dealing with a sustained capital outflows from the stock market.
The Bank of Korea said on Tuesday it sold
part of its foreign exchange reserves for a fourth consecutive month in June to “ease volatility in the foreign exchange market”, a phrase used to
describe its intervention.
It did not disclose how much it sold, but
the intervention as well as the dollar’s spurt against the other major
currencies caused the dollar value of its foreign reserves to shrink by $9.43
billion in June.
Currency traders shrugged off the drop in
foreign exchange reserves, saying it was largely expected and also attributable
to changes in the dollar’s value, while cautioning further sharp and disorderly
changes could be problematic.
South Korea’s foreign reserves were ranked
ninth in the world at the end of May and at $438.28 billion, were enough to
cover more than seven months of imports based on the monthly average amount for
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