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Opening of Gov’t FX Market Intervention Increases Korea Exporters’ Concerns
Weaker Base for Exports
Opening of Gov’t FX Market Intervention Increases Korea Exporters’ Concerns
  • By Yoon Young-sil
  • April 16, 2018, 11:48
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South Korea has become forced to disclose the size of its exchange market intervention.
South Korea has become forced to disclose the size of its exchange market intervention.

South Korea has avoided being designated as a currency manipulator by the US. However, the US government demanded that Korea quickly disclose its foreign exchange market intervention, the Korea will take greater risk.

The US Treasury Department included Korea, China, Japan, Germany, Switzerland, and India ascountries to be monitored in regard to exchange rates through the Exchange Rate Policy Report onthe US’s major trading partners on April 13 (local time). The United States did not designate currency manipulators or countries for intensive analysis under the Trade Promotion Act. If a country records a trade balance surplus of US$ 20 billion or more, its current account surplus exceeds more than 3 percent of its GDP and intervene the foreign exchange market in one direction so net buying exceeds 2 percent of its GDP, the US designates the country as a currency manipulator.

Korea met only two conditions -- a trade surplus of more than US$ 20 billion (US$ 23 billion) and the current account surplus to GDP ratio (5.1 percent). Market intervention was 0.6 percent of its GDP so did not meet the condition.

As a result, Korea avoided being designated as a currency manipulator, but Korea has become forced todisclose the size of its exchange market intervention. The US Treasury Department said that the department would "strongly urge the Korean government to monitor its exchange rate policiesand disclose its exchange market intervention in a transparent and timely manner." The US Treasury Department believes that Korean foreign currency authorities precluded the Korean won from being appreciated through the net buying of US$ 9 billion. In particular, the US Treasury Department pointed out Korea foreign currency authorities prevented the appreciation of the Korean won through a US$ 10 billion exchange market intervention from November of last year to January of this year.

In response to such demand from the United States, the Korean government decided to disclose details of foreign exchange market intervention. However, it is forecast that Korea will brood more over how to minimize a drop in the exchange rate.Kim Dong-yeon, deputy prime minister and the minister of finance and planning of Korea will finalize consultation about the disclosure of Korea’s foreign exchange market with Steven Mnuchin, US secretary of treasury among others by attending a meeting of finance ministers of the world's top 20 economies (G2) and the spring meetings of the International Monetary Fund (IMF) and the World Bank (WB).

Experts say that although Korea avoided being listed as a currency manipulator, a possibility of future intervention by the Korean government in the exchange market is expected to shrink significantly due to the disclosure of information about exchange market intervention. This means thatthe Korean government will lose a card that the government can pick in the event of such a sharp fall in the Korean won-US dollar exchange rate that will probably affect Korea’s export markets negatively.

In the market, there is concern that the profitability of Korean exporting companies may deteriorate due to the Korean won’sappreciation. The Hyundai Economic Research Institute estimated that if the won-dollar exchange rate falls 1 percent, Korea’s total exports will slide 0.51 percent. By industry, exports of machinery (0.76 percent), IT products (0.57 percent), and automobiles (0.4 percent) are expected to decline most considerably.

"In the global export market, the Korean machinery and automobile industries, which are fiercely competing with the Japanese counterparts, and the Korean IT industry with a high proportion of exports, are highly sensitive to exchange rate changes," the report said.