One of the issues that most riles up South Korean financial regulators is an extreme surge or drop in the local currency.
The Korean won strengthened more than 8% against the dollar last year and is continuing on that trend, while Japan’s stimulus is ready to spur more fund inflows into emerging markets. It’s safe to say that Korean authorities are pretty nervous right now.
This was evident last week during a plenary session at the Asian Financial Forum in Hong Kong. South Korean finance minister Bahk Jaewan made clear that economies should not be using economic policies to induce a weakening of their currencies, and warned that he’ll start to strengthen measures to stabilise the Korean won.
This statement came seconds after his Japanese counterpart urged the audience that his country was not involved in intentional devaluation of the yen.
When South Korean regulators start to raise their rhetoric on the currency, the financial markets are quick to heed such warnings. Rumours start to float among foreign exchange dealers that authorities are putting the stops on moves against a certain level, for example, and very few challenge it.
But another interesting tidbit about controlling the currency came from a junior debt syndicate banker when Asiamoney PLUS was recently in Seoul. Other than the fact that temperatures were below minus 6 degrees Celsius, he was concerned that the Korean authorities were also asking borrowers to cut down the amount they issue in foreign currencies.
The logic was that companies tapping global bond investors for foreign currencies such as dollars would swap it back into the won and drive up the value of the currency even further. A swaps trader warned that companies should refrain from doing that now, especially at a time when regulators are on the lookout.
Although some of South Korea’s most frequent issuers such as Korea Finance Corporation and Korea Development Bank shrugged off the warning, saying that it hardly affects them because they provide foreign currencies to companies who need it during the actual business transaction, this nonchalant attitude has not spread to all quarters.
One senior banker said it was “ridiculous” that the finance ministry was trying to control the won through this channel, while another banker said he was going to fold hopes of making substantial fees in the debt capital markets (DCM) this year. He’ll plough away at possibly making more money in the equity capital markets instead, he said grudgingly.
It is understandable that South Korean officials are cautious about the currency’s every move. Most of them saw the country go bankrupt during the 1997 Asian financial crisis when the won nosedived to about 2,000 against the dollar, and they’ve been very vigilant in guarding against moves that were deemed too rapid ever since.
The fear stems from the fact that a stronger currency raises prices of televisions and mobile phones that it exports to the world that account for about half of the peninsula’s gross domestic product. A relatively weaker currency helped companies such as Samsung and LG Electronics gain a better footing in overseas markets in the past few years against their Japanese rivals such as Sony and Panasonic.
But it’s hard to question whether sometimes, the Korean government goes a little too far when it comes to guarding against appreciation. For example, Samsung has been reaping record profits in the past few years, and it is set to reach another record in the last three months of 2012. A weaker won may have helped the company to a certain extent, but it’s also the company’s products that have helped it come this far.
If anything, less protection on the currency front will force these multinational companies to become more competitive in the global market place and can only lead them to manufacture more competitive and innovative products.
The inflow of funds is also a sign of confidence in part by the international investor in South Korea’s economy. The country has reaped a trade surplus of US$28.5 billion in 2012 and it has over US$320 billion in foreign-exchange reserves that gives it ammunition to steer clear of revisiting another Asian financial crisis. South Korea’s commercial banks are also one of the most coveted global bond issuers in Asia, which reflects their ability to attract funding.
These fundamentals give Korea more than enough room for the currency to strengthen further. One thing to note is that a stronger won will also make imported goods cheaper and more affordable to the lower class. This can be a helpful outcome since newly-elected president Park Geun-hye has underscored her plans to boost social spending and benefits for them.
It is time for Korea to grow out of the fear that 1997 will repeat itself in the distant future and become more relaxed about the appreciation of the won. Officials have complained that they are no longer an emerging market. If that is the case, they need to start believing in it first.