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Seoul braces for biggest Brexit fallout among Asian nations
By Kim Jae-won
The export-driven Korean economy will feel the biggest squeeze in Asia from Britain's decision to leave the European Union, as Brexit will bring protectionism back to the international stage, economists said Sunday.
They said the country, whose trade volume accounts for almost 90 percent of its gross net income, will suffer a further shrinkage in external trade with other nations, affected by the downward spiral to an anti-globalization mood.
"If the broader EU were to experience a growth slump as a result of Brexit, the impact on Asia would be more material," said Frederic Neumann, co-head of Asian Economics Research at HSBC, in a report. "The external trade and finance- (or debt-) dependent economies are expected to feel the biggest squeeze: Korea, Japan, Taiwan, Malaysia, Singapore, Hong Kong, and Thailand."
As Asia's fourth-largest economy faces heightening uncertainty and unfavorable trade conditions in global markets, the government will come under increasing pressure to draw up a supplementary budget to keep the already sluggish economic growth from weakening further.
The government recently revised down its growth forecast from 3.1 percent to 2.8 percent, but it became more difficult to achieve the lowered target, according to economists.
The government is expected to set up at least 10 trillion won for an extra budget. But analysts say it is not enough.
The Hyundai Research Institute said the government needs to set aside at least 26 trillion won at the earliest possible time to boost the economy.
Hong Jun-pyo, a researcher at the institute, said that a large extra budget is essential for the economy to weather low growth, tough corporate restructuring and growing uncertainties in the global market.
To keep the financial market from reeling from the shock of Brexit, the government has pledged to move quickly and decisively by mobilizing all of its resources.
Finance Minister Yoo Il-ho hosted an emergency meeting with officials from the Bank of Korea and the Financial Services Commission to discuss measures to stabilize financial markets.
The Ministry of Trade, Industry and Energy also said that it is considering signing a free trade agreement with the U.K. to resolve business uncertainties between the two countries. The announcement came amid British law firms showing their concerns about running their businesses here after Brexit.
Analysts said that Seoul stocks will continue to fall this week, after plunging more than 3 percent Friday, as foreign investors are expected to move to safer assets. The Korean won, which lost its value by 29.7 won against the U.S. dollar on Friday, is also expected to remain weak.
A weaker won also forces foreign investors to exit from Seoul stocks as a weaker won makes their holdings cheaper in dollar terms.
"Foreign investors will continue to dump their holdings, worrying that a strong dollar may weaken values of Korean stocks," said Kim Jeong-hyeon, a strategist at IBK Securities. "In particular, European investors will lead this trend as they are relatively short-term investors sensitive to foreign exchange rates and economic situations."
Neumann at HSBC also said global investors may adjust their portfolio investments from other Asia-Pacific countries to Japan to hedge foreign exchange risks. "The yen could soar, pulling funds back into Japan, hurting lending and portfolio investment in places like Australia, New Zealand, Indonesia, Malaysia and Korea," said the senior economist.
