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More safety nets needed to prevent forex shortages

Posted March. 21, 2020 07:43,   

Updated March. 21, 2020 07:43


Stock and foreign exchange rates stabilized in South Korea on Friday on news that it would sign a 60-billion-dollar currency swap with the U.S. On Friday, the benchmark KOSPI index, which fell to the 2009 level of 1.,457.64, reversed course to hit 1,566.15 on Friday, while the won-dollar exchange rate, which jumped to 1,285 won to the greenback, stabilized significantly to close at 1,244 won.

A currency swap agreement is a promise to switch each other's currencies according to a predetermined exchange rate. South Korea and the U.S. were able to sign a currency swap agreement promptly because they shared mutual interests. The U.S. did not want the world to plunge into a financial crisis for its own sake, and was responsible for stabilizing the global financial market as a key currency issuer. It is fortunate that South Korea has been included in the countries for the U.S.’ currency swaps along with Denmark, Norway, Sweden, Australia, New Zealand, Brazil, and Mexico.

The South Korea-U.S. currency swap offers temporary easing from potential risks in foreign currency settlements stemming from dollar shortages, but does not mean that the threat itself has disappeared. Due to South Korea’s deteriorating exports, the inflow of dollars has been continuously decreasing. Given that foreigners are treating the Korean capital market as an “automatic teller machine in Asia,” they could sell Korean stocks en masse and switch into the dollar to leave the market in droves as it has done over for the past several days, leaving the risk of dollar shortages unresolved.

South Korea already signed 133.2-billion-dollar currency swap agreements with seven countries including China and Australia. In addition, the nation reportedly has foreign exchange reserves worth 401.9 billion dollars, twice the amount in 2008, but this can hardly be considered sufficient. Foreign investment accounts for as much as 40 percent of the domestic capital market, and international trade takes up about 70 percent of the nation’s gross domestic product (GDP), which is two to three times that of the U.S. and Japan. For this reason, South Korea is regarded as the country that is most vulnerable to a global economic crisis, and the importance of foreign exchange management cannot be overemphasized in a crisis situation. We already experienced this enough in two previous crises back in 1997 and 2008.

The more safety nets for foreign currency South Korea puts in place, the better it will be at a time when how the situation will unfold going forward is quite uncertain. The South Korean government should seek to sign a currency swap deal with Japan, which will help both sides, while putting unfriendly emotions aside for a while. Despite not being as powerful as the dollar, the Japanese yen serves as a key currency in the global financial market along with the euro. The ongoing global economic crisis caused by the virus pandemic must be tackled by the whole world collectively and cooperatively.