Published : Jan. 21, 2016 - 18:53
Policymakers in the government and the central bank have refuted an argument by a local research institute that the country’s foreign exchange reserves are far from enough to cope with another bout of global financial crisis.
A report released by the Korea Economic Research Institute this week suggested Korea needs nearly $80 billion more in forex reserves to guard itself against a possible global emergency. The suggestion cast a shadow on what has been perceived as a robust aspect of the country’s economy besieged by deteriorating conditions at home and abroad.
The country held $367.9 billion in currency reserves as of December, the seventh largest in the world, according to data from the Bank of Korea. The figure marked an increase of $4.4 billion from a year earlier, though it was down by $500 million from the previous month.
Officials at the Ministry of Strategy and Finance claim Korea’s currency reserves remain close to the upper end of a proper band ranging from $250 billion to $370 billion, which was agreed on during Seoul’s annual consultative meeting with the International Monetary Fund last year. BOK policymakers also point out the country is a net creditor in international financial markets, with its banks and companies holding large amounts of assets abroad.
Financial authorities see little possibility the country will be hit by a massive capital outflow down the road despite increasing volatility in the global economy.
But many economists note that a cautionary stance should be differentiated from excessive pessimism as necessary for taking correct steps at a time when the Korean economy is at a crossroads of boosting growth momentum or tumbling into a crisis.
They say the country should be prepared against the possibility that market conditions will become more volatile than presumed in a contingency plan policymakers have drawn up.
In this regard, there has been rising calls for Korea to move to expand currency swap deals with major economies as a way of enhancing its capability to secure liquidity in case of a serious global dislocation. It may prove improper that Korea exerts intentional efforts to further increase its currency reserves when it has piled up large amounts of trade surplus ― amounting to $90.4 billion last year.
Finance Minister Yoo Il-ho, who took office Wednesday, said at his confirmation hearing that consideration could be given to expanding the country’s currency swap schemes, including the restoration of an arrangement with Japan.
Currently, Korea has swap deals with China, the United Arab Emirates, Indonesia, Malaysia and Australia, which combined are worth about $80 billion, nearly 70 percent of which is arranged under an agreement with China.
Experts note these arrangements will hardly be instrumental in Korea securing additional reserves in U.S. dollars.
They say it is necessary to make more active efforts to resume a swap deal with Japan sitting on a foreign-exchange reserve of more than $1.2 trillion, indicating the Japanese yen can be changed into the greenback anytime in global currency markets.
Korea and Japan last year ended their $10 billion currency swap line, the last in a series of swap arrangements set up between the two countries since July 2001. The Seoul-Tokyo swap line reached as high as $70 billion in 2011 before being scaled back as bilateral ties continued to deteriorate over historical and territorial issues. The two sides did not extend swap deals worth $57 billion and $3 billion in 2012 and 2013, respectively.
The improvement in bilateral relations in the wake of an agreement last month on resolving the issue of Korean women forced into pre-1945 wartime sexual slavery for Japanese soldiers is seen to help foster favorable conditions for expediting the resumption of a mutual swap line.
Some critics here remain skeptical about restoring the swap line with Japan, saying Tokyo has attempted to use it as a tool to put pressure on Seoul in the course of their diplomatic dispute. But more experts express the view it would be in the interests of both sides to restore a mutually beneficial framework designed to strengthen their preparedness for turbulence in global markets.
If anything, a currency swap deal is largely a psychological weapon rather than an arrangement with practical effectiveness. But this kind of tool is what Korea needs to preempt a possible crisis to be prompted by a complex set of external risks ― a deepening slowdown in China, a continuous rise in U.S. interest rates, lower oil prices and security threats from Pyongyang.
Economic commentators point out that a $30 billion currency swap deal Seoul signed with Washington in October 2008 helped Korea go barely scathed through the global financial crisis at the time. The deal expired two years later.
Establishing a swap line with Japan will result in Seoul being part of an international financial stability mechanism the U.S. has set up by inking currency swap deals with major advanced economies, including the European Union, Britain, Canada and Switzerland as well as Japan, on a permanent basis.
By Kim Kyung-ho
(
khkim@heraldcorp.com)