Investors have been absorbed in how higher interest rates in the United States would impact stock markets around the world.
There has been little discussion about its aftermath closer to home but the fact is Asian countries cannot overlook it.
South Korea is an example.
The US is the second largest exporter to South Korea and its third-largest importer.
That means the US has a key role in the South Korean economy.
South Korea’s economic take-off in recent years largely stemmed from robust export growth amid a weak Korean won.
US monetary policy has far-reaching effects on the global foreign exchange market.
Since the Federal Reserve announced the interest rate liftoff last week, world currencies have weakened.
The won has lost nearly 7.7 percent against the US dollar this year and 5.3 percent against the Japanese yen.
In October, the currency tumbled to a new low after the China Foreign Exchange Trade System published a new exchange rate index.
The Fed is unlikely to raise interests rates any further anytime soon, so the won may be headed for an uptick in the short term.
Apart from a strong dollar, low interest rates in South Korea have contributed to a weaker won in recent years.
The Korean central bank has cut interest rates twice this year by as much as 0.5 percent.
Interest rates have been hovering at a record low of 1.5 percent for six straight months.
Household debt has been climbing, particularly mortgage loans.
Household debt and growth rate both hit a record high in the third quarter, with banks pumping another 14.3 trillion won (US$3.67 billion) worth of loans to households in the third quarter.
About 11.5 trillion won or 80 percent of the credit were mortgage loans.
Household debt accounts for 82 percent of the country’s gross domestic product which is quite worrying.
As a result, various government bodies have recently tightened mortgage approvals.
A new cap on loan growth will take effect in February next year.
By then, banks would have stepped up stress tests based on a 2.7 percent interest rate to evaluate their loan-to-value and debt-to-income ratios.
The new regulation requires mortgage borrowers to pay both interest and principal rather than interest only in the first few years.
In 2007, interest-only mortgage loans accounted for 22 percent of such loans.
This year, they make up 67 percent of the total, according to Nomura.
The new rules are expected to ease a housing bubble and remove uncertainty over the financial system.
Nomura said South Korea might cut interest rates by another 0.25 percent next year.
If that happens, the nation’s long-term economic prospects will receive an enormous boost.
Meanwhile, South Korean equities have done fairly well amid sluggish performances by other Asian markets.
The benchmark KOSPI index is up 3.3 percent this year.
Institutional and individual investors have been selling equities since June but they have bought 470 billion won and 100 billion won of stocks, respectively, in the past week alone, according to Morgan Stanley.
KOSPI has a 12-month estimated P/E ratio of 12.5 times and a P/B ratio of 0.95 in past 12 year.
Investors looking to buy into South Korean stocks could consider four South Korean equity ETFs listed in Hong Kong and traded in Hong Kong dollar.
However, they should note the foreign exchange risk.
This article appeared in the Hong Kong Economic Journal on Dec. 22.
Translation by Julie Zhu
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