A new skirmish in the currency wars? South Korea is preparing to fight ?speculative? investors betting on the won, as the currency?s appreciation against the US dollar and the Japanese yen erodes Korean exporters? competitiveness.
The won has weakened against the dollar this year, losing 2 per cent. But that was after a 4.6 per cent gain in the last three months of 2012. Against the yen, which is crucial for Korean exporters, the won is up 3.4 per cent this year, following a 16 per cent gain in Q4 2012. No wonder Seoul is sabre-rattling.
On Wednesda
y the won eased 0.3 per cent to close at Won1,085.46 to the dollar after deputy finance minister Choi Jong-ku said the government was considering taxes on currency trading and bonds to curb hot money flows into Asia?s fourth-largest economy.
?The external environment and foreign exchange market movements since the fourth quarter of 2012 have created a considerably worrying situation,? Choi said in a prepared speech for a seminar.
He did not elaborate on the proposed taxation but said it would be similar to the so-called ?Tobin Tax? on short-term speculative foreign investment. Choi said the country was still opposed to imposing an outright levy on financial transactions but would consider similar measures if needed to fight speculators.
He said the government will tell state-run companies to refrain from borrowing abroad and will further tighten regulations on banks? currency derivatives trading to reduce volatility in the currency market.
The country tightened restrictions on currency forwards in 2010 and last year, with domestic banks now allowed to hold currency derivatives positions equivalent to only 30 per cent of equity while foreign bank branches can go up to 150 per cent of equity.
In addition to that, Seoul has introduced a set of capital control measures in recent years including taxing foreign investment in local bonds and imposing a levy on banks? offshore debt, in order to counter rapid capital inflows.
Government officials are wary over ?excessive? capital inflows, due to their bitter memory of the 1998 Asian financial crisis triggered by sudden capital flight. Concerns of the stronger won have intensified since the country?s exports unexpectedly fell for the first time in three months in December, down 5.5 per cent from a year earlier.
But analysts predict that it would be difficult to reverse the won?s strengthening with such measures because the Korean currency has been boosted by the country?s relatively strong economic fundamentals and widening trade surplus. However, most remain optimistic about the country?s export outlook, saying that Korean companies can withstand the stronger won thanks to their enhanced brands and product quality.
Data published on Wednesday showed the country?s industrial output unexpected rose 1 per cent in December from the previous month while its current account posted a $2.25bn monthly surplus.
Still, the stronger won remains a concern for the export-driven nation, which relies on external demand for half of its economic growth, especially as the won has appreciated sharply against the Japanese yen. Currency rates are becoming more unfavourable to Korean exporters, who directly compete with Japanese rivals in many sectors including electronics and autos.
Lee Sang-jae, an economist at Hyundai Securities, says that it is too early to be either optimistic or pessimistic about the country?s export outlook, noting that the country?s daily average exports this month remain steady, in line with the last quarter of 2012. He forecasts a 5 per cent annual growth in 2013 exports, following a 1.3 per cent fall last year, as the export recovery is expected to accelerate from the second quarter.
?But whether this forecast will be realised or not depends on the global economic recovery stemming from the US rebound, which could offset the worsening currency environment,? he notes. It is the global economic trend that counts the most for a small open economy like South Korea.
Related reading
S Korea: a dose of economic reality, beyondbrics
S Korea holds rates as economy tepidly recovers, beyondbrics
South Korea: In search of a new model, FT
Source: http://blogs.ft.com/beyond-brics/2013/01/30/seoul-rattles-its-sabre-in-currency-war/
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