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President Lee Myung-bak, who is visiting Peru, said intervening in the foreign exchange market creates bigger problems, adding it was best not to impact the currency market. An official at the Ministry of Strategy and Finance said authorities have stopped intervening in the market, aside from exceptional situations where the won-dollar exchange rate fluctuates wildly.
The Lee government has intervened aggressively since it was launched. As soon as it was inaugurated, the administration artificially weakened the won to boost exports and aid economic growth. This led to confusion in the market. Then, during the second half, it began intervening to strengthen the won to tame consumer prices, which were hit by soaring crude oil costs. While the government did that, Korea¡¯s foreign currency reserves fell from US$264.2 billion in March to $212.2 billion at the end of October.
Even if you exclude the amount of foreign currency the Bank of Korea used to support banks facing forex shortages or the amount of money it lost in the exchange in Japanese yen and euro investments, the government has spent between $25 billion to $30 billion to intervene in the forex market.
Yet the won, which stood at W930 against the U.S. dollar at the beginning of this year, has now plummeted to W1,500, weakening 60 percent compared to the end of last year. In the end, the government wasted between $25 billion to $30 billion. When the won strengthened, the government intervened saying it needed to keep export competitiveness high. When the won weakened, it intervened again saying it needed to keep consumer prices in control and protect the won. No wonder the forex market is chaotic.
Since 2000, the government has accumulated a deficit of W26 trillion due to the issuance of forex stabilization bonds aimed at defending the Korean currency. This is the result of suffering exchange rate losses on top of losses from investing in derivative products like non-deliverable forwards (NDF) to aggressively intervene in the market. Losses from the bonds must be covered by taxpayers¡¯ money.
The main reason the won weakened against the dollar is because foreign investors are pulling out of Korean stocks and bonds. This trend is expected to continue until the domestic and global financial markets return to normal and the real economy gets back on track. One fortunate development is that global crude oil prices have fallen to below $50, easing the pressure on consumer prices.
Attempts to intervene in the forex market to achieve other economic targets can have severe side effects. The government should not worry about every fluctuation of the won but realize that the most prudent exchange policy is to wait until the global economy recovers and in the meantime strengthen Korea¡¯s economic fundamentals to achieve a trade surplus.
(englishnews@chosun.com )
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