Larger FX Reserves Needed for Unification of Two Koreas
By Kim Jae-kyoung
Staff Reporter
South Korea needs to set aside larger foreign exchange reserves to better prepare for any unexpected external shocks and in anticipation for the reunification of South and North Korea, according to the Bank of Korea (BOK).
``I don’t think the current level of foreign reserves is over the optimal level, given that South and North Koreas are turning to embrace each other,’’ Lee Shang-heon, director general of the BOK’s international department, told The Korea Times.
``It is desirable that the nation secure a higher level of reserves, as the nation has yet to achieve a stable financial system and must also prepare for further progress in relations with North Korea,’’ he added.
The central bank said that Korea’s current international reserves are considered sufficient to cope with any possible foreign exchange outflows, like foreign investor repatriation of portfolio investments and the redemption of short-term loans, among other things.
The nation’s foreign exchange reserves hit a fresh high of $118.30 billion at the end of October, up more than $95 billion from the end of 1997.
Having hit a low of $3.94 billion in December 1997 when the financial crisis was shaking the nation, foreign reserves rose steadily to $117.0 billion at the end of last month, up from $102.82 billion at the end of last year, $96.19 billion at the end of 2000 and $74.05 billion at the end of 1999.
Jang Won-chang, a research fellow at the Korea Institute of Finance (KIF), said that although some criticize the current level of foreign reserves as too much, the nation should at least maintain the present level because its financial system is still vulnerable to external shocks and the won still remains weak against major currencies.
Market experts said the recent stability of the Korean currency was largely based on the extent of the nation’s foreign exchange reserves, which rank fourth in the world following Japan, China and Taiwan.
After having plummeted to 1,964.8 won against the dollar on Dec. 24, 1997, the won had since strengthened alongside improvements in economic fundamentals such as larger current account surpluses and has stabilized in the 1,200-1,300 won range for the past few years.
Market analysts forecast that the Korean won is expected to strengthen against the dollar in the latter half of next year after losing some value in the first half, in line with the yen’s movements.
``In general, the won-dollar exchange rate will remain stable,’’ Lee of BOK said. ``But the future course of the won-dollar rate will be mainly led by the yen-dollar rate.’’
Lee hinted that the won will appreciate against the dollar in the second half of 2003 when predicting the yen will rise against the greenback during the same period after being weak in the first half.
The KIF forecast that the won will weaken to 1,231 won against the dollar in the first half of next year, but strengthen to around 1,195 won in the second half. The local currency closed at 1,209.10 won against the dollar Monday.
``The won-dollar rate will likely drop in the second half due to the nation’s economic recovery,’’ Jang of KIF said. But he said that the won will follow the yen.
According to the BOK, the correlation coefficient between the two monetary units, with the exception of August, continued to hover above 0.9 during the April-September period. The coefficient of reading 1 means that the won-dollar exchange rate exactly moves in the same direction as the yen-dollar rate.
Jang said that it is hard to say when the won will say ``goodbye’’ to the yen, but it seems that the degree of the won’s conformity to the Japanese unit will probably be eased somewhat in the latter half of next year.
Global investment banks have similar views on the won-dollar exchange rate forecasts for 2003.
Morgan Stanley forecasts the won-dollar exchange rate will stay at 1,260 won at the end of March next year and 1,220 won at the end of June. Both Citibank and Deutsche Bank expect the rate to reach 1,300 won in March and 1,250 won in June.
JP Morgan and Goldman Sachs predict the exchange rate to reach 1,175 won and 1,200 won, respectively, at the end of March, before settling at 1,150 won at the end of June.
Woori Bank expects that the won-dollar rate will drop to 1,150 won in the first half of next year, bolstered by the nation’s stronger economic fundamentals than other advanced nations.
``The government will not tolerate the won’s excess strength against the dollar because the nation’s dependency on exports remains very high,’’ Lee Min-jae, deputy general manager of the Woori’s international finance department.
Meanwhile, experts say the current won-dollar exchange rate is considered reasonable.
``It is not proper to evaluate whether the exchange rate is optimal or not because the rate is decided by supply and demand,’’ Lee Shang-heon of BOK said. ``Macro-economically, however, the present level seems to be within the optimal range.’’
Lee Min-jae of Woori also said it is likely the current level is widely acceptable for both exporter and importers, judging from the fact that neither of them have been complaining recently. |
