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(EDITORIAL from Korea Times on March 19)

All News 07:02 March 19, 2020

Foreign exchange volatility
Korea needs currency swap deal with U.S., Japan

Keeping the foreign exchange market stable is crucial in weathering potential financial and economic woes. This is all the more important now because the coronavirus-triggered health crisis is wreaking havoc on the global economy. That's why South Korea, an export-oriented economy vulnerable to external shocks, should make concerted efforts to ensure stability in the currency market.

The won-dollar exchange rate has become extremely volatile amid global stock market crashes and tumbling crude oil prices. The local currency plunged to a 10-year low of 1,245.7 won against the U.S. dollar Wednesday. It lost 52.7 won, or 4.4 percent, against the greenback over five trading days from March 12.

The Korean currency faces mounting uncertainties following a stunning U.S. interest rate cut and other market stabilization and economic stimulus measures. Concerns are growing that if foreign investors continue their selling spree on the Seoul stock exchange, the won could come under greater downward pressure. Foreigners posted a net selling of 8 trillion won (US$7.1 billion) worth of Korean shares over the past 10 days.

Another negative factor is the continuing decline in exports, the country's main engine for economic growth. Overseas shipments are expected to suffer a far stiffer fall due to the disruption of global supply chains amid the rapid spread of the coronavirus. A predicted sharp drop in China's industrial production and economic growth will deal a further blow to the Korean economy, which was already in the doldrums well before the coronavirus outbreak that originated in China last December.

Against this backdrop, the country's current account surplus shrank sharply by 70 percent to US$1 billion in January from a year earlier. Making matters more complicated, falling corporate profitability may lead to lower credit ratings for domestic businesses and banks. This could also make it difficult for companies and financial institutions to borrow money and raise capital overseas, possibly causing a shortage of the dollar and other reserve currencies.

Worse, Korea may witness a massive outflow of capital as seen in the 1997-98 Asian financial turmoil and the 2008 global financial crisis. No one knows what will happen if the coronavirus crisis turns into an unprecedented global financial and economic crisis.

The Ministry of Economy and Finance has decided to raise the cap on banks' currency forward positions to supply more dollars to the Seoul currency market starting Thursday. But it is doubtful if the measure will help stabilize the market.

Now, the Moon Jae-in administration should pull out all the stops to work out contingency plans to better cope with any unpredictable consequences. It needs to replenish the country's foreign reserves that stand at $401.8 billion. It also needs to strike a currency swap deal with the U.S., Japan and other countries as a safeguard against potential foreign currency shortages.

Of course, it is most imperative to concentrate on containing the spread of the epidemic. Yet it is also equally important to map out more drastic fiscal and monetary measures to overcome deepening economic difficulties and ensure financial stability.

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