WASHINGTON, Oct. 15 (Yonhap) — South Korea does not face the same dollar-securing challenge faced in previous financial crises and currently maintains a “stable” foreign exchange liquidity position despite recent heightened financial market volatility, Seoul’s top central banker said Saturday.
Bank of Korea (BOK) Governor Rhee Chang-yong made the remark in a speech at the Peterson Institute for International Economics, a Washington-based think tank where he attended the annual meetings of the International Monetary Fund and World Bank.
“Korea’s net international investment position in June 2022 is 41 percent of gross domestic product. Considering over $410 billion in foreign exchange reserves as of September 2022 and the relatively low ratio of short-term foreign debt to foreign exchange reserves, Korea’s foreign exchange liquidity is very stable,” Rhee said.
“In terms of external debt, any negative balance sheet effects of the stronger US dollar are mitigated by the lower share of dollar-denominated debt and the higher share of won-denominated debt,” he added. “There are no conspicuous liquidity shortages in the foreign exchange financing market.”
He underscored the resilience of South Korea’s financial markets as local stock and currency markets have been in volatile trading amid mounting fears that aggressive monetary tightening in key countries could lead to an economic recession.
South Korea’s currency has lost significant ground recently, particularly in September, raising concerns that its falling value could hamper the country’s ongoing efforts to fight inflation by making imports more expensive.
The BOK has intervened to facilitate “herding” in the FX market by offloading dollars. The country’s foreign exchange reserves shrank last month at their fastest rate in around 14 years.
On Wednesday, the BOK implemented its second major rate hike of 0.5 percentage points, the eighth hike since August last year, in a bid to tame inflation.
The central bank also cited the widening interest rate differential with the United States and the rapidly depreciating won, which could lead to massive capital outflows from South Korea, as reasons for the sharp rise.
Rhee underscored the need for “the right policy mix” to prevent herd behavior in the FX market from hurting the broader economy, although he assured that the BOK is not targeting a specific exchange rate level.
“While floating exchange rates play a role as a shock absorber to the strong dollar trend, finding an appropriate policy mix of monetary and other policies to ensure rapid exchange rate movements do not lead to economic anxiety has become important,” he said.
“It goes without saying that the BOK is not aiming for a specific level for the exchange rate, but it needs to consider how a sharp appreciation in the exchange rate would affect financial stability conditions, such as: B. Pressure on capital outflows,” he added.
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