`Foreign Capital Outflow Inevitable Over Short Term`

The presidential office of Cheong Wa Dae yesterday expressed cautious optimism over the Korean economy’s ability to overcome a global financial crisis.

In the wake of the Wall Street debacle, a leading presidential aide said, “Though time is needed, we believe the economy can weather this crisis without major difficulty. Until the (U.S.) liquidity crisis is resolved, an exodus of foreign capital (from Korea) is inevitable for the time being.”

“American financial institutions that need liquidity to get over financial turmoil seem to consider Korea as the best place to secure liquidity. If they set out to sell domestic stocks, we will have difficulty providing foreign currencies.”

Foreign sell-offs of domestic stocks, however, are expected to help reduce the proportion of foreign investment in the domestic stock market. The won’s rebound against the greenback will fuel a decline in the current account deficit, the official said, adding, “All this will be favorable to the nation’s economy.”

“Though the gloomy prospects for the international market are expected to undermine exports, domestic consumption will revive due to declining commodity prices,” he said. “In particular, since growth of domestic demand creates more jobs than growth of exports, it will help bring about a virtuous economic cycle.”

On the bankruptcy of Lehman Brothers, he blamed greed for more profits through sell-off deals. "The investment bank lowered its guard too much. Many experts say American financial institutions are excessively dependent on the internal risk management system,” he said.

swpark@donga.com