Impact of the sinking of Cheonan warship on Korean economy: Teleconference with global investors and foreign press
2010/06/24 7 Comments
10o’clock in the morning, on May 27, in a hectic conference room of Financial Services Commission (FSC) building in Yeouido, Seoul, a worried Hongkong investor’s question filled the room through the speakerphone “Korean stock market is experiencing foreign capital outflows since North Korea became an alleged suspect in sinking of Cheonan warship by the experts and investigators, what do you expect of the future situation?
Kwon Hyouk-se, Vice Chairman of the FSC carefully answered “It is true that recently, the foreign capital outflowed from the stock market, however, the increased investment in Korean bond market clearly shows that geopolitical factors on Korea’s financial market have limited effect. The chance of massive capital outflow like we experienced in 2008 to be repeated is very slim.”
The FSC, the Financial Supervisory Service (FSS), the Ministry of Foreign Affairs and Trade (MOFAT), and the Bank of Korea (BoK) for the first time ever held a joint teleconference for foreign investors and press in order to explain the circumstances of Korean economy after the sinking of Cheonan warship.
An investor from Singapore asked “What will be the effect from sinking of Cheonan warship on Korea’s credit rating in the future?” Lee Jang-Yung, Senior Deputy Governor of FSS, replied “Moody’s recently raised the rating for Korea, however S&P still rates Korea at 2 levels lower than before the crisis. Considering it is at the same grade with Israel, it should be adjusted.” In fact right after the announcement of findings on Cheonan incident, Korea’s Credit Default Swap (CDS) premium rose to 172bp which is a much overestimated value. It is higher than those of other countries with similar credit rating (Czech, China and Slovakia) and even higher than those with risk of war (Israel and Thailand).
For questions about effects of the risk on economic fundamentals like investment and consumption, Vice Chairman Kwon confidently commented “It would be limited to short-term effect considering past cases.”
Questions about the outlook for power succession in North Korea and the possibility of military collision followed, Wi Sung-Lac, Special Representative of Korean Peninsula Peace Committee from MOFAT, replied “It is not easy to answer because we do not know the internal affairs of unstable North Korea politics however, we heard from our sources that certain procedures are taking place in order to succeed Kim Jong-Il’s power to his son. Considering unique North Korean system and their government structure, even after the succession, we expect there will not be a drastic change.” Mr. Wi also added “After the incident, the government has been trying to tighten up the securities with United States to restrain North Korean military actions, and we are confident in keeping a stable balance. Although we consider this incident as one of the most serious military threats over the years, we have managed more intense situations properly for decades with the help of international support. Military responses are not any consideration for Korea and we will be focusing on building up an international consensus to oppress North Korea from taking further provocations.”
An anonymous investor asked “What is the role of BoK in case of foreign currency liquidity deterioration?” Ahn Byung-chan, BoK’s International Department Director General, answered “recent sharp rise of exchange rate was a result of series of events solely from Southern Europe’s financial crisis to Cheonan incident, we consider options of approaching exchange rate volatility through smoothing operation which will help keeping exchange rate at limited changes.” He also added further details can not be disclosed at this time.
Vice Chairman Kwon referred to ‘Lex Column’ from May 25th on Financial Times and commented “This clearly shows the situation, current weakness of exchange rate for Korean won will support the performance of Samsung Electronics and Hyundai Motors who heavily reply on exports.” Almost 200 foreign reporters and investors around the globe took part in this teleconference meeting. Lee Jung-ho, foreign spokesperson for FSC, said “Given the fact that thirty or forty people usually attend regular teleconference meetings, this (joint) teleconference drew very high attention.” He continued “So many questions were asked that we had no choice but to limit questions by regions and investors.” Experts evaluated this teleconference was a very successful one and it was done in timely manner to give good clarification for foreign media rather than the usual short domestic press oriented briefings.