SEOUL/SEJONG (Yonhap) – The move by the U.S. Federal Reserve to further reduce its monthly bond purchases by $10 billion will have little impact on South Korea's economy, the government said Thursday.
An official at the finance ministry said the extent of stimulus cut announced overnight by the Federal Open Market Committee's (FOMC) had been anticipated for some time, and judging by present circumstances, it should not pose new challenges for the economy.
Seoul expects Asia's fourth largest economy to expand 3.8 percent in 2014, up from 2.8 percent last year.
The insider's prediction comes after the Fed said it will stay on course by reducing monthly asset purchases to $65 billion, starting in February, citing a strengthening of the economy. The move remains consistent with the FOMC's decision reached in December to reduce asset buying from $85 billion to $75 billion in January. It had said further cuts are planned for the rest of the year.
The source, however, made clear the government is carefully monitoring the market as a whole.
"Tapering the economic stimulus comes at a time when some emerging markets are facing uncertainties that may spread to other economies and even developed markets and such a development requires close observation," the official stressed. He said due to such risks, Seoul is keen to maintain its current emergency monitoring regime.
In regards to any impact the latest tapering will have on South Korea's financial market, Financial Services Commission (FSC) Vice Chairman Jeong Chan-woo also said in an early morning meeting of senior policymakers that the country is well insulated.
He pointed out the country maintains sizable foreign reserves, has a sound fiscal policy and a healthy current account surplus.
"Judging by such conditions any fallouts on the local market will be very limited, although there may be a need to keep close tabs on sudden fluctuations in the market," the official claimed. He added that the Fed's move could even have beneficial effects by allowing South Korea to differentiate itself from more exposed emerging markets.
Some market watchers have speculated in the past that the sound South Korean economy can attract more investors, who may grow weary of some emerging economies.
Jeong added that reducing the stimulus is another sign that the U.S. economy is on the mend.
Despite his confidence, the official said the financial regulator will maintain its guard and work with related agencies to implement any contingency plans if the need arises.
The U.S. Fed had engaged in its third quantitative easing program in September 2012 to supply more liquidity into the market. The expansive monetary policy aimed to create more jobs and breathe new life into the economy that had not recovered from the financial crisis that started in late 2008.