South Korean banks remain resilient to the fallout of the recent U.S. banking crisis, but risks of the property market still remain elevated, a senior official of the International Monetary Fund (IMF) has said.

South Korea has been closely monitoring the impact of U.S. Silicon Valley Bank’s failure and a subsequent crisis over Credit Suisse, a major global investment bank.

“Korea’s financial system, including the traditional and internet banking sector, has been resilient to recent banking stress in the U.S. and Switzerland,” Krishna Srinivasan, who heads the IMF’s Asia and Pacific Department, said during an interview with Yonhap News Agency on Thursday.

“Direct linkages in Korea to affected institutions abroad were quite small. And conservative prudential requirements and ample capital buffers should help banks weather any significant adverse shocks.”

The IMF official noted the country should not worry about capital outflow, despite the widened rate gap between the United States and South Korea.

“Capital outflows and extreme movements can happen for many reasons. It’s not just because of interest rate differentials,” he said. “Let’s not forget, Korea’s macro-fundamentals are very strong. Fundamentals are what drive market sentiment. And there, I feel Korea is very strong in a very good position.”

The U.S. Federal Reserve raised its benchmark rate by a widely expected quarter-point to a 5 percent-5.25 percent range Wednesday (local time), further widening the rate gap with South Korea.

The Bank of Korea held its key rate steady at 3.5 percent last month after a rate freeze in February as inflation appears to be easing and concerns are rising over an economic slowdown.

The South Korean central bank is scheduled to hold its monetary policy meeting later this month.

“Policy rate decisions will need to remain data dependent, resolutely addressing inflation and minimizing the risk of overtightening,” he said, adding that “premature easing should clearly be avoided.”

Srinivasan said the IMF is still keeping a watchful eye on vulnerabilities related to real estate.

“In particular, there are still risks associated with real estate project financing. While overall liquidity conditions have improved, credit risk remains elevated for some small and medium-sized developers and construction firms,” he added.

Srinivasan noted recent data has already shown “some early signs of moderation in housing price declines and a tentative recovery in transaction volumes.”

According to data from the Korea Real Estate Board, the number of houses traded in February was 41,191, a 4.6 percent decrease from the previous year. Despite this decline, the figure represented a nearly 60 percent increase from the preceding month.

“The authorities’ recent deregulation and tax measures aim to support housing demand and facilitate transactions, which together with continued tightness in housing supply, particularly in the greater Seoul area, could help to contain the ongoing housing price decline,” he said.

“In the event of worse-than-expected shocks, the Korean authorities have the policy space and tools to limit financial spillovers and lessen the adverse impact on the economy,” the director added.

Touching on South Korea’s slowing exports, Srinivasan said the country’s trade balance will “gradually recover” as the semiconductor business cycle normalizes.

“Korea’s recent export drop has been mainly due to the semiconductor downcycle and subdued growth in key trading partners, including China,” the director said.

“While growth has rebounded after its exit from the zero COVID policy, China’s recovery has been oriented primarily toward domestic services so far, delaying Korea’s export recovery,” he said.

“Later in 2023, we expect the technology cycle to return in favor of Korea. We also expect the growth in China will have a strong effect on exports from Korea,” the director added.

In April, South Korea’s exports fell 14.2 percent on-year to US$49.6 billion. Outbound shipments have logged an on-year fall since October last year amid aggressive monetary tightening by major economies to curb inflation and an economic slowdown.

It is also the first time since 2020 that exports have declined for seven months in a row.

Srinivasan added the looming fragmentation in the global trade is expected to give adverse impacts on South Korea.

“I think a fragmentation is a clear risk. So what Korea should do is strengthen its relations with all partners so that you can have a diversification,” he added. “When you diversify, you kind of protect yourself against fragmentation.”

Srinivasan called for South Korea to have “inclusive” trade agreements.

“Korea has made some very important relationship building recently with Japan. All these things will help you diversify and strengthen your trade flows.”

Source: Yonhap News Agency