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Tue, October 3, 2023 | 06:36
Economy
'Interest hike risks Korean economy'
Posted : 2014-04-16 16:59
Updated : 2014-04-16 17:12
Kim Rahn
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By Kim Rahn

Frederic NeumannHSBC economist
Frederic Neumann
HSBC economist
Global interest rate increases will be the biggest risk for the Korean economy because it will slow down growth in many countries and thus Korean exports to them, said a senior economist Wednesday.

Frederic Neumann, co-head of the Asian Economic Research at HSBC, said the growth of most Asian countries including China and Korea since the global financial crisis has been dependent on debts. He said such growth is not sustainable without economic reforms.

"Because growth is dependent on credit, the No. 1 risk for emerging Asia, China and Korea is that interest rates could rise globally," Neumann said in a media conference at HSBC Korea building in Seoul.

"If interest rates rise because the Federal Reserve tightens monetary policy, that will have big negative effect on growth in China and therefore also in Korea. The rising interest rate is the No. 1 risk," he said.

Neumann said Korea is less sensitive to global interest rates than other Asian countries because it has strong fundamentals including large current account surplus and foreign reserves. But this does not mean Korea is insulated from the risk, he said.

"Korea is such a big export-dependent economy. And rising interest rates slow down growth in China, India, other Asian countries and Europe, then that hurts Korean exports."

He said another risk is continuing depreciation of the Japanese yen, as Japan rivals Korea for many export items.

Neumann pointed out that Japanese exports have not increased much despite the weak currency, because exporters did not cut the prices of their products.

"It means up until today, Korea has never faced true competitive pressure from Japan," he said. "Gradually Japanese exporters can start to cut prices. Even the Japanese yen remains stable, they still can cut prices. So gradually the worry about competitive pressure from Japanese exports is going to increase, making it a little bit hard for Korean exporters."

Neumann expected Korea's domestic economy to recover, citing rising housing prices as one reason. "About 70 percent of Korean household wealth is tied up with real estate. So, if real estate price starts to rise, people will feel richer and start to spend more."

HSBC predicted the Korean economy will grow 3.2 percent this year, lower than the Bank of Korea's estimate of 4 percent. It expected the central bank to the raise base rate starting in the third quarter.

Emailrahnita@koreatimes.co.kr Article ListMore articles by this reporter
 
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