Business

Friday November 20, 2009

S. Korea tightens control over forex liquidity


SEOUL: South Korea announced yesterday measures aimed at tightening control over foreign exchange liquidity to make the banking system less vulnerable to the capital flight seen during the financial crisis.

The Financial Services Commission, a financial watchdog, said the measures would enhance the soundness of banks’ foreign currency assets in Asia’s fourth largest economy which was heavily reliant on exports.

But the regulator said the country would not try to directly control foreign currency liquidity conditions at foreign bank branches in the country, although the branches would be subject to new regulations on forward deals.

Authorities appear to be looking at ways to avoid a repeat of the capital flight that occurred during the global financial crisis, partly triggered by worries about the ability of companies to roll over their foreign debt liabilities during the global credit crunch.

One measure called on banks to hold at least 2% of their total foreign assets in foreign treasury bonds rated A or above, or set aside a certain amount of safe foreign assets, such as Treasuries, in proportion to the value of liabilities maturing within a year.

The measure will not apply to foreign bank branches in the country. However, restrictions were placed on both local banks and foreign bank branches in trading foreign exchange in forward markets.

“Exporters’ excessive FX hedging boosted short-term foreign currency debts, worsening the credit crisis last year. As the economy heavily relies on external factors, we may face the same situation if we experience another crisis,” said Jeong My-young, a currency strategist at Samsung Futures.

“The authorities are showing their determination to minimise the potential impact from hedging practices,” she added.

The steps were expected to weaken bets for a firmer won as exporters will be less aggressive in buying the local currency, traders said.

“Next year, the won will not necessarily rise further,” said a currency trader at a foreign bank in Seoul.

Reflecting the view, the won turned lower and fell as much as 0.4% in the morning, although it is up almost 9% since the start of the year. — Reuters


For Another perspective from The Korea Herald, a partner of Asia News Network, click here


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