South Korea still clings to old-school currency

It has cast off most of the other trappings of a developing economy over the past decade
Newsfeed12 Dec 2019
Photo credit: AFP Photo

Market news selected by the DBS Chief Investment Office

South Korea is headed into the 2020s with an Emerging Markets currency, even after casting off most of the other trappings of a developing economy over the past decade.

The exports powerhouse is a global leader in technology and home to consumer brands that are known around the world. Its per capita income has passed USD30,000 and the government recently gave up developing-country privileges at the World Trade Organization. Even its problems – from low inflation to a falling birth rate – have more in common with Europe and North America than emerging nations in Asia.

Yet the South Korean won can only be directly exchanged with the dollar and the yuan, and trading overseas is limited to the Chinese currency in Shanghai. What is more, the country’s USD50b foreign exchange market opens for just six-and-half hours a day: from 9:00 am to 3:30 pm.

“Authorities are reluctant to let the won trade offshore,” said Lee Jang Young, a former deputy governor of the Financial Supervisory Service. “They’re scared that any vulnerabilities will be exploited by foreign investors to launch ‘speculative attacks’ on our markets,” said Lee.

Their fears have deep roots in the Asian Financial Crisis of the late 1990s, when South Korea’s finances collapsed as global funds pulled huge sums of money out of the country. The won’s near 7% slump this year, the biggest of any Asian currency by a wide margin, is a reminder to officials of its vulnerability.

The current fallout from the US-China trade war and South Korea’s own spat with Japan only serves to reinforce the defensive mindset of policymakers. They have looked on with rising concern this year as exports fell month after month. Any change to the currency regime now would also come as South Korea confronts the rise of China as a rival for technical innovation, and as the country struggles to adjust to slower growth rates that are part and parcel of becoming a mature economy.

Yet change is exactly what South Korea needs, according to advocates of internationalising the won like Lee, the former regulator. He argues that reducing dependence on the dollar would also lessen the risk of external shocks.

Having to exchange won for dollars before swapping into other currencies like the euro and the yen raises costs for Korean companies and complicates doing business. Allowing the currency to trade 24 hours a day in global markets would likely see the cost of exchanging money come down, while also bringing fiercer competition for local financial firms. As things stand now, investors must rely on derivatives contracts known as non-deliverable forwards to manage their exposure to the won offshore outside of Korean trading hours. – Bloomberg News.

The US Dollar Index (DXY) fell 0.29% to 97.128, the euro added 0.34% to USD1.1130, the pound gained 0.30% to USD1.3196, and the yen strengthened 0.15% to 108.56 per dollar.


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