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Can the Korean won become a reserve currency?

Presidential nominee Lee Jae-myung of the ruling Democratic Party of Korea (Joint Press Corps)
Presidential nominee Lee Jae-myung of the ruling Democratic Party of Korea (Joint Press Corps)
Presidential nominee Lee Jae-myung of the ruling Democratic Party of Korea claimed that the South Korean won is close to becoming a reserve currency, a comment that was immediately met with a huge uproar and mocked.

During a presidential debate Monday, Lee said he is aware of a report that South Korea is close to seeing its local currency become a reserve currency like the US dollar, which will enable the country to increase its budgetary spending and raise the national debt level without worries.

"Our country’s national debt level is much lower than those of other advanced nations," Lee said while debating monetary policies with his main rival Yoon Suk-yeol of the main opposition People Power Party.

"Our debt ratio is not even at 50 percent, and there was a report that Korea has high probability of reaching the status of reserve currency nation soon."

He also elaborated on the idea in answering a follow-up question from People’s Party candidate Ahn Cheol-soo about whether Lee is aware of the difference between countries issuing reserve currencies and those that do not.

"Of course, I know. Our economy is strong enough to potentially see itself become a country owning a reserve currency," Lee said.

Ahn refuted that countries without the power of reserve currency like South Korea could run into problems if they issue more treasury bonds, as the demand for them are not high overseas.

Lee was arguing for increased government spending in response to financial difficulties from the COVID-19 pandemic and anti-virus rules, claiming the government must be willing to make up for any losses incurred by Koreans, even if it that takes raising the national debt level.

He was claiming that raising the debt level would be manageable if South Korea sees its national currency obtain reserve currency status, hinting he is willing to aggressively raise the annual budget to launch his initiatives.

Lee was citing a report released from the Federation of Korean Industries on Feb. 13 that South Korea could push to have Korean won to earn special drawing rights, which is a status defined and maintained by the International Monetary Fund as supplementary foreign exchange reserve assets.

At the moment, the US dollar, euro, Chinese yuan, Japanese yen and British pound are defined as currencies with special drawing rights, enabling them to be called reserve currencies in the global market.

The local business lobbying group said Korea could reasonably work to bring its currency to that level, citing the country’s notable economic status, high export volume, increasing volume of international trade using Korean won and accordingly growing international recognition of the currency.

But the reality is that the Korean won is far from reaching that level, as its proportion of use in global transactions is not even on the list of top 20 currencies being used.

According to the Society for Worldwide Interbank Financial Telecommunication, the US dollar was the most used currency in global transactions in January, accounting for 39.92 percent of total. The euro came in second with 36.56 percent, followed by the pound (6.3 percent), yuan (3.2 percent) and yen (2.79 percent).

In response to Lee’s Monday comments, the Federation of Korean Industries said in a statement that the Feb. 13 report was to spread a hopeful message for Korea to prevent future economic crises, not as an analysis of certainty that South Korea’s currency could be included in the list of currencies with special drawing rights.

"Even if South Korean won is included in the basket of currencies with special drawing rights, demand for Korean won-based government bonds will not immediately increase," the group added.

Experts also criticized Lee's Monday comments, saying Korean won is far from reaching the level of reserve currency, as earning that status requires an issuing country to obtain significant trust on an international level in terms of economic, political and military power.

"I have no idea what the basis of his comment was," said Park Jung-soo, an economics professor at Sogang University, in response to Lee’s comment made during the TV debate.

"There is an almost zero percent chance for South Korea to reach that status in the future. Even China is struggling to reach that status, and I definitely think he was misinformed or there was a miscommunication between him and his staff members."

Opposition campaigns immediately lashed out at Lee over the ruling party candidate’s comments, questioning if he really is a “competent presidential candidate strong on economy” as is said in his main campaign slogan.

"It makes my heart race to hear that (Lee) will make our country a reserve currency nation to take care of our national debt," People Power Party Chairman Lee Jun-seok said in ridiculing Lee’s comments.

The People Power Party concentrated fire on Lee’s ignorance of the basic economic concept, saying Lee might be a candidate who could bring another financial crisis to South Korea.

"Even though South Korea grew into an internationally competitive economy, its weakness in the international financial market has been a major Achilles' heel," Rep. Her Euna, a senior spokesperson for the People Power Party's presidential campaign team, said in a statement Tuesday.

"Printing more money in mimicking reserve currency nations could plummet the value of Korean won and be a major threat to the economy."

By Ko Jun-tae (ko.juntae@heraldcorp.com)
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