The Bank of Korea: "External Conditions Uncertain... Risks Scattered Across Emerging Markets and Other Areas"

The Bank of Korea's '2020 First Half Financial Stability Report'

[Asia Economy Reporter Jang Sehee] The Bank of Korea forecasted that the deepening economic recession in emerging countries and the strengthening of risk-averse tendencies could lead to large-scale capital outflows and defaults. Additionally, it emphasized the need to be cautious about the realistic possibility of potential risks such as the US-China trade dispute and the resurgence of the novel coronavirus infection (COVID-19).

On the 24th, the Bank of Korea analyzed the external situation in the '2020 First Half Financial Stability Report' approved at the Monetary Policy Committee meeting.

The Bank stated, "Especially, countries with small foreign exchange reserves or a high proportion of foreign securities investment experience currency depreciation during large-scale capital outflows," adding, "there is a possibility that related risks may increase, such as the widening of bond spreads."

In the case of South Korea, although there is not much risk exposure to emerging countries with financial instability concerns and external soundness is good, it urged caution regarding contagion risks.

As of the end of May, foreign exchange reserves stood at $407.31 billion, an increase of $3.33 billion in one month. The proportion of short-term external debt rose to 37.1%, but it remains lower than during the financial crisis (78.4%).

It also anticipated that if the economic recession deepens and foreign capital outflows expand, the risk of default in countries with high external sector vulnerabilities may increase.

The bond market also shows continued sluggishness in the issuance of non-investment grade corporate bonds. Therefore, there are calls to accelerate liquidity supply by establishing a Special Purpose Vehicle (SPV). By the end of May, the swap rate (-0.05%) had recovered to pre-sharp decline levels, and volatility had significantly decreased compared to March.

However, it emphasized the need to be cautious about the possibility of a future decline in swap rates, as overseas equity-linked derivative securities balances still coexist.

This content was produced with the assistance of AI translation services.