South Korea’s economic prospects have darkened due to sharp spikes in the Korean currency value, oil prices, and interest rates that would weigh down on the recovery in the economy heavily reliant on exports and imported fuel on top of potential risks from colossal load of household debt.
The won has been on a steep rise on strong exports and foreign appetite for Korean equities. The won closed at Thursday at 1,085.4 won against the U.S. dollar, up 3.7 won from the previous day’s close of 1,089.1 won. It broke the 1,080-won threshold for the first time since May 2015.
The strengthening was undisturbed by verbal intervention from financial authorities warning against speculative activities.
At 1:00 p.m. Friday, the won slipped to 1,085.00 won.
Global crude prices are also on upward spiral to reach their highest in two years because of tight inventories and supply interruptions in North America. The Brent crude futures were at $63.48 while the West Texas Intermediate (WTI) crude futures hit $58.37 Friday. Markets tightened ahead of the peak winter season globally as the Organization of the Petroleum Exporting Countries and other oil producers mull output cuts.
Another worry is the uptick in interest rates. Bank mortgage loans rates have gone up sharply on expectations that the Bank of Korea will raise the base rate for the first time in more than six years at the upcoming monetary policy meeting on Nov. 30. The interest rate on mortgage-backed loans, which take main part in household debts, has been on a steep rise in line with Cost of Funds Index (COFIX)’s sharp upward movement. COFIX is an average of interest expenses incurred by financial institutions and in turn, it is used to calculate interest rates on loans.
Korea’s major commercial banks including KB Kookmin, Shinhan, and Woori on Nov. 16 simultaneously raised interest rate on mortgage-backed loans to between 3.02 percent and 4.02 percent from previous range of 3.01 percent and 4.01 percent. Lending rates on some five-year mixed type (loan with interest rate shifting from fixed to floating after five years) home loans broke above the psychologically important 5% range.
Market watchers forecast market interest rate will move up at even faster rate when the central bank delivers rate hike, which could unsettle the load of household debt that exceeded 1,400 trillion won in September.
By Kim In-oh and Cho Jeehyun
[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]