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How this Asian nation plans to fight the taper turmoil

Monday, 26 Aug 2013 | 3:09 AM ET
How South Korea can battle global risks: Deputy PM
Sunday, 25 Aug 2013 | 6:44 PM ET
Concerns are rising in South Korea about the impact of Abenomics and Fed's tapering. CNBC's Chloe Cho asked Deputy Prime Minister and Finance Minister Hyun Oh-seok how the economy can deal with these external factors.

South Korea is ready to tackle the potential fallout from a winding down of U.S. monetary stimulus and would embrace tightening measures if necessary, the nation's deputy prime minister told CNBC.

Hyun Oh-seok, minister of strategy and finance, said Asia's fourth-largest economy is "prepared to tighten macro-prudential measures should the country witness capital outflows and downward pressure on its financial account."

The interview took place earlier this month and was broadcast on Monday.

(Read more: We are sticking with South Korea, says Stanchart's Bindra)

Although South Korean markets have been hit by the "taper terror" that has swept across Asia over the past month, the benchmark Kospi stock index has held up relatively well. It has lost just 1 percent compared with a fall of 11 percent in Indonesia stocks, among the worst hit in the region.

Oh-seok remained optimistic about South Korea's long-term prospects.

"I think that Korea will remain resilient given its financial soundness, current account surplus and the relatively low levels of short-term debt," he said.

South Korea has avoided bearing the brunt of the selling in emerging markets thanks to solid economic data.

(Read more: Data could cast bigger shadow on emerging markets)

Shoppers walk in the Myungdong shopping district in Seoul, South Korea.
Getty Images
Shoppers walk in the Myungdong shopping district in Seoul, South Korea.

The economy posted its fastest level of growth in nine quarters for the April-June period while short-term external debt fell to a six-and-a-half-year low during the same period.

"The fact that a lot of foreign investors are active in Korea's financial markets shows that the country is a level playing field. The stock market aside, Korea's bond market is seeing a rise in net capital inflows," Oh-seok added.

According to data from the Financial Supervisory Service (FSS) earlier this month, foreign investment in Korean bonds rose for the sixth straight consecutive month in July.

(Read more: Residents to drive South Korean outflows to record highs)

Despite the relative stability in South Korean markets, Oh-seok said the U.S. central bank needed to be mindful about the impact its policies would have on emerging markets.

"I, for one, noted that the U.S. should be mindful of the reverse effect as a rout in emerging markets will eventually crimp U.S. economic growth. Any Fed tapering needs to be done through international cooperation and consultation," he said.

Apart from an imminent reduction in U.S. stimulus, Japan's aggressive reform program, known as "Abenomics," was seen as the other external risk facing South Korea's economy.

At a recent Group of 20 meeting in Washington, Oh-seok said that Japanese Prime Minister Shinzo Abe's doctrine posed an even bigger risk to the country than North Korea.

Oh-seok said that in order to combat a double blow of Fed tapering and Abenomics, Seoul should move towards balanced growth from exports and consumption.

(Watch now: South Korea needs a change)

One consequence of aggressive monetary stimulus in Japan has been a sharp weakening in the yen at the expense of other currencies such as South Korea's won.

"A depreciating yen will hurt Korea,which directly competes with Japan in exports. That's why we need to diversify our export markets in China, the EU and the U.S. to minimize the impact,"Oh-seok said.

By CNBC.com's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC

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