The country’s chief economic policymaker pledged Monday to take steps to stabilize the local financial market in case of increased volatility amid the escalating trade standoff between the US and China.
However, financial authorities’ position on the recent steep weakening of the won remains ambiguous, as Hong Nam-ki, the minister of economy and finance, did not elaborate on what steps the country would take.
The Korean currency lost value against the US dollar by 5.4 percent over the month to last Friday, when the won-dollar exchange rate reached 1,195.7 won per dollar, putting the won at its weakest in 28 months.
Hong’s remarks were seen as a kind of verbal intervention in the currency market to support the value of the won.
But speculation is rampant that financial authorities will continue to let the won depreciate, to help boost sluggish exports of Asia’s fourth-largest economy.
Korea’s overseas shipments of goods fell in April for the fifth consecutive month. With US-China trade friction escalating and global demand for Korea’s key export items falling, the decline is likely to continue in May.
In the weeks before Hong’s remarks, financial authorities had repeatedly said they were closely monitoring whether there was excessive one-sided movement. An official at the Ministry of Economy and Finance said last week fluctuation in the value of the won could not be considered excessive compared with other major currencies, prompting the won to lose value sharply against the dollar.
Hong appeared to be giving a clearer signal that the government would be ready to take action to cope with excessive volatility in the market. But his comments were not enough to dispel the impression that financial authorities might step forward to moderate the pace of the won’s depreciation but not to reverse or halt the trend.
However, allowing the won to continue weakening would run the risk of having a significantly negative effect on international assessment of the country’s economic fundamentals and of downgrading its credit standing.
The steep weakening of the won over the past month was partly prompted by the release of data that showed the Korean economy contracted 0.3 percent on-quarter in the first three months of the year.
Uncertainties surrounding the won-dollar exchange rate would draw back corporate investment and private consumption, dampening the prospect of the country’s economic growth.
A possible downgrading of Korea’s sovereign rating as a result could restrict the government’s ability to use fiscal tools to help bolster the economy.
It would also increase borrowing costs of Korean companies, most of which have suffered a sharp drop in profits. The combined net profit of 573 nonfinancial listed firms, many of which are exporters, declined nearly 40 percent from a year earlier to 20.9 trillion won ($17.5 billion) in the first quarter of the year, according to data from the Korea Exchange and the Korea Listed Companies Association.
A weaker won would also precipitate the exodus of foreign capital from local bourses. Foreign investors extended their selling streak to eight consecutive trading sessions through Monday, dumping a combined net 1.72 trillion won worth of local shares.
Without more positive engagement by financial authorities, it seems that the won-dollar exchange rate will climb to near 1,250 won in the short term.
The depreciation of the won is supposed to help increase the country’s exports by making its products less expensive in overseas markets. However, as some officials have noted, the effect of a weaker won might be limited, as major Korean export items are less dependent on price competitiveness than in the past.
It would be wise for financial authorities to be more active in curbing the won’s depreciation through timely verbal interventions and easing operations. Efforts to shore up the value of the won would be less susceptible to criticism that financial authorities are manipulating the currency market.
In preparation for possible market turbulence, Seoul needs to move toward reopening a currency swap line with Tokyo, putting aside a prolonged row between the two sides over historical issues.
In 2017, Japan suspended talks with Korea on reinstating a swap line in protest against the installation here of another statue symbolizing Korean women forced into wartime sexual slavery for Japanese soldiers.
Korea and Japan ended their swap deal worth $10 billion in 2015, the last in a series of swap arrangements set up between the two countries since July 2001.