The South Korean government has announced it would disclose its net foreign exchange trading history every six months and reduce the interval to every three months in one year.
The government’s move is a response to pressure from the United States to reveal Korea’s foreign exchange trading history.
The South Korean government has not disclosed the history of its forex market stabilization measures to maximize the effectiveness of its forex policy. This has led the United States to think that the Korea government intervenes in the forex market for currency depreciation.
To push Korea toward disclosing forex trading data, the U.S. Department of Treasury has put South Korea on its foreign exchange monitoring list five times in a row since the first half of 2016. Likewise, the IMF advised the Korean government to disclose the history of its forex market stabilization measures in 2016 and last year.
Enhancement of Forex Policy Transparency Anticipated
According to the Bank of Korea, South Korea’s average daily inter-bank forex trading volume was US$22.85 billion last year. The volume had been US$1.1 billion in 1998 when the Korean government adopted a free floating exchange rate system. This means South Korea’s forex market has grown more than 20-fold along with the won’s presence in the international market.
Experts point out that the government’s decision to disclose the data is based on its judgment that now is the time to enhance the transparency of its forex policy based on the growth of the local market.
At present, the won is one of the most frequently traded emerging market currencies. In addition, South Korea’s foreign exchange reserves skyrocketed from US$3.9 billion in 1997 to US$398.42 billion last month.
“With the local forex market growing in size, the impact of the government’s move on the market has been on the decline,” said KB Kookmin Bank senior economist Kim Seon-tae. He added, “During the period, smoothing operations constituted the biggest portion of its forex market intervention.”
A smoothing operation can be defined as fine tuning conducted only when exchange fluctuations are excessive. This means the South Korean government has conducted no active intervention, and yet it has been misunderstood due to the non-disclosure of the trading data.
In fact, South Korea is the only OECD member country that is yet to disclose that type of data. Among the G20 countries, 14 are currently doing so except for South Korea, China, Indonesia, South Africa, Saudi Arabia and Russia.
Market Impact Likely to be Limited
According to the government and experts, the phased disclosure of the market intervention history is likely to have a limited impact. The government is going to maintain its principle of letting the market determine forex rates with interventions made only when there are significant fluctuations.
The market is in agreement with the government. The news about the disclosure of the data led to no significant market movement on May 17. “The new policy is predicted to have little impact on the market,” said Woori Bank researcher Min Kyung-won, adding, “It is unlikely to cause local currency appreciation although it can accelerate an appreciation of the won after it occurs.” The researcher also pointed out, “Even except for direct forex market intervention, the government still can intervene by other means such as pension funds.”
Yonsei University professor Seong Tae-yoon also mentioned that the disclosure is limited to the net trading history and has an interval of six months and, as such, its impact will be negligible.
Still, he said that the local forex authorities’ intervention pattern can be figured out once the interval is shortened to three months, and then some difficulties may arise regarding forex reserves and volatility management.
After the disclosure, the transparency of South Korea’s forex policy will surpass the level specified in the Trans-Pacific Partnership (TPP) Agreement.
Concerns Expressed over Forex Speculation
Nonetheless, the experts voiced their concerns when it comes to the local financial market, saying the disclosure itself would have a negative impact on the market and can be abused by forex speculators. They pointed out that the forex authorities will have a harder time controlling market fluctuations once an appreciation of the won speeds up with their grip weakened than before.
“If the Korean won appreciates in the second half of this year based on improved inter-Korean relations, even more currency speculators will begin to test the local market, and then the disclosure of the trading history may worsen the situation,” said Min of the Woori Bank, adding, “These concerns cannot but be particularly serious in the South Korean financial market, which is smaller in size yet much more open than those of advanced economies, and this means South Korea as a country highly dependent on exports can take a direct hit once a strong won is not properly handled.”
Analysts also point out that South Korean exporters’ profitability may deteriorate due to the higher level of foreign exchange volatility that is likely to follow less market intervention by the government. “When appreciation continued in the past, the authorities absorbed the pressure by means of intervention,” LG Economic Research Institute senior analyst Lee Chang-seon explained, continuing, “From now on, however, the degree of intervention will be reduced, and then the pressure can mount or the pace can accelerate, which is no good news for exporters.”