Korean authorities as elsewhere have begun to pull out all the stops for damage control against the unexpected outcome of British vote last week to leave the European Union (EU).

Both government and monetary authorities have turned decisively aggressive in expansionary campaign to offset negative ripples from the British decision that is feared to batter the world’s fifth largest economy and shake the unity in the EU whose institution has been challenged for its failure to solve fiscal, economical, immigration, widening imbalance and divide among member countries, and rise of terrorism problems. Some fear the British independence could encourage others to opt for protectionist and isolationist policies over globalization and liberalization that had dominated the international order for the last half a century.

But in the shorter run, local authorities and experts assure the ramifications on the Korean economy may not be as big as seen during the 2007-2008 financial crisis. The local markets have recovered from initial panic. On Wednesday, the Korea Composite Stock Price Index closed 1956.36 up from 1925.24 on Friday, the day local investors received the stunning news from London. The secondary Kosdaq finished 669.88, up from 647.16. The U.S. dollar fell to 1,160.20 won from 1,179.9 won on Friday.

Foreign capital movement so far was less worrisome. Foreign net sales in Korean shares over the last three trading days totaled 577.7 billion won. According to the Financial Supervisory Service, British capital that pulled out 50 billion won worth on Friday returned in the same scale on Monday. On Tuesday, net sales by European capital stopped at 100 billion won worth.

Authorities, relieved to see market volatility ease this week, however, pledged to keep up close vigil as “uncertainties remain high as Britain’s exit from the EU is first of such kind,” Yim Jong-yong told lawmakers on Wednesday.

But the kind of uncertainties from Britan’s departure from the EU bloc is different from the shockwave triggered by the Wall Street meltdown. In 2008, local and global economies were hard hit from liquidity crunch due to domino meltdown of large financial institutions. Fears of bank run and additional insolvencies loomed big over global markets. The blow this time came from political arena, rather than the financial and economic field. The breakup also will take place after Britain and EU negotiate the terms of exist over the next two years or so. Uncertainties over what may or may not happen have translated into initial panic across the world.

▶ More reason for rise than fall for Korean shares

Since no one can exactly decipher the uncharted path following Britain’s exit, authorities meanwhile vow to employ all available policy means to minimize the negative effects on near horizon and accelerate reforms to strengthen the economy for the longer run.

The government plans to create 10 trillion won in supplementary budget and additional 10 trillion won through increased investment and policy funding by state institutions to prop up domestic demand in the second half as to offset volatile external front. The larger-than-expected additional budgetary spending for the second half is expected to aid growth by up to 0.3 percentage point.

The fiscal expansion would help augment the effect of a recent rate cut by the central bank. In so-called “pre-emptive” move against Brexit and other uncertainties for the second-half economy, the Bank of Korea in earlier June brought down the benchmark rate to new record-low of 1.25 percent from 1.50 percent. The synchronized move will likely aid investment sentiment. Over the last decade, the government appropriated supplementary budgets five years. Stock markets were helped in four cases.

The U.S. Federal Reserve is more likely to extend the hiatus on its tightening cycle with the Brexit factor along with the ongoing presidential race adding to more uncertainties to the world’s largest economy. Some experts believe foreign capital would opt to turn to Korean and other emerging markets whose values are at 15-year-low amid lack of investment options and volatility in the European markets.

Although external demand overall would be hurt amid concerns about the British and EU economies, exporters would be helped by the spike in U.S. dollar and Japanese yen due to capital preferences over safer assets. Market analysts now predict second-quarter operating profit of Samsung Electronics could reach as much as $7 billion thanks to favorable foreign exchange conditions.

But for lasting resilience, authorities must push ahead with corporate restructuring and other structural reforms, and companies with streamlining and development of new ventures and growth engine to use the Brexit as a turning point for the Korean economy.

By Jung Hyuk-hoon

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]