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Choo downplays need for swap and pitches stability fund
2022-09-29
The finance minister threw more cold water on the idea of Korea signing a currency swap agreement with the United States.
His comments came just two days after a major rout in the global markets in which the won hit a new 13-year low and panic began to set in.
"There is no need for excessive concern," Finance Minister Choo Kyung-ho said on Ilyojindan, a weekly talk show on KBS.
The won is down around 18 percent from the beginning of the year, its fall accelerating in recent weeks as the U.S. Federal Reserve reiterated its hawkish stance and raised rates 75 basis points for a third consecutive time.
On Friday, the won closed in Korea at 1,409.30 won and continued to decline in the futures markets as the wheels came off in London and New York.
With the Korean central bank in a tough spot in terms of interest rates, due to the indebtedness of households and the teetering property market, the government has been struggling to find ways to stabilize the currency market.
During the KBS show on Sunday, Choo outlined a plan for the use of a foreign exchange stabilization fund. Under the plan, the fund will support the issuing of futures contracts for exporters.
Companies have had a difficult time in getting these contracts from financial institutions due to volatility in the financial markets. With the government steeping in, exporters will be better able to hedge their risk and forecast future cash flows.
Korea had a currency swap with the United States from November 2008 and February 2010 and another from March 2020 to December 2021.
Under these arrangements, Korea is able to access dollars at a set rate over a given period of time from the Federal Reserve, ending fears about a dollar shortage and bringing confidence to the market.
The possibility of another contract has been mentioned but no concrete steps have been taken. During the visits of President Joe Biden in May and Treasury Secretary Janet Yellen's in July, no agreement was reached.
In recent weeks, the signals have been mixed, with negations hinted at by officials but never confirmed. During the visit of President Yoon Suk-yeol to the United States Sept. 19th to Sept. 22nd, nothing was announced regarding a currency swap.
"A currency swap would definitely help stabilize our foreign exchange market, but international financial organizations do not think Korea's situation has reached the point yet," Choo said. "Our situation is very sound and not insecure."
Korea was the ninth largest holder of foreign reserves as of the end of July, and its net foreign assets total $740 billion, said Choo, adding that Korea and the United States agreed to activate "various liquidity supply measures" when needed.
To stabilize won, the Bank of Korea said Friday it has agreed to open a dollar-for-won currency swap line with the state pension fund to ease demand for dollars in the domestic foreign exchange market.
The swap deal allows the National Pension Service to borrow foreign reserves held by the central bank in exchange for its local currency holdings.
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