South Korea does not face the same challenge of securing dollars as previous financial crises and currently maintains a “stable” foreign exchange (FX) liquidity position despite recent heightened financial market volatility, Seoul’s top central banker said Saturday.
Bank of Korea (BOK) Gov. Rhee Chang-yong made the remark in a speech at the Peterson Institute for International Economics, a think tank based in Washington, where he was attending annual meetings of the International Monetary Fund and the World Bank.
“Korea’s net international investment position is 41 percent of gross domestic product as of June 2022. Considering the over US$410 billion in foreign exchange reserves as of September 2022 and the relatively low short-term external debt to FX reserve ratio, FX liquidity conditions in Korea are highly stable,” Rhee said.
“Regarding external debt, any negative balance sheet effects from the stronger U.S. dollar are diminished by the smaller share of debt denominated in dollars and higher share denominated in won,” he added. “There are no conspicuous liquidity strains in the FX funding market.”
His emphasis on the resilience of South Korea’s financial markets came as the local stock and FX markets have been in volatile trading in the face of rising worries that aggressive monetary tightening in major countries could result in an economic recession.
The South Korean currency has lost significant ground recently, especially in September, stoking anxiety that its falling value could hamper the country’s ongoing efforts to fight inflation by making imports more expensive.
The BOK has intervened to ease “herd behavior” in the FX market by unloading dollars. In the process, the country’s foreign reserves shrank at the fastest pace in about 14 years last month.
On Wednesday, the BOK delivered its second big-step rate hike of 0.5 percentage point, the eighth increase since August last year as it strives to tame inflation.
The central bank also cited as reasons for the sharp increase the widening rate gap with the United States and the fast depreciating won that could precipitate massive capital outflows from South Korea.
Rhee underlined the need for a “proper policy mix” to prevent herd behavior in the FX market from hurting the overall economy, though he assured that the BOK is not targeting a specific exchange rate level.
“While flexible exchange rates do play a role as a shock absorber for the strong dollar trend, it has become important to find a proper policy mix of monetary policy and other policies to ensure that rapid exchange rate movements do not lead to creating economic anxiety,” he said.
“Needless to say, the BOK is not targeting a specific level for the exchange rate, but it has to consider how a sharp rise in the exchange rate would affect financial stability conditions, such as capital outflow pressures,” he added.
Source: Yonhap News Agency