By Kim Jae-kyoung
Staff Reporter
Global credit rating agency Standard and Poor's (S&P) has warned that heavy and continued state intervention in the South Korean market could undermine investor confidence and negatively affect the country's sovereign credit rating.
In an e-mail interview with The Korea Times, Takahira Ogawa, S&P director for sovereign ratings, said the country's deteriorating external position together with the Bank of Korea (BOK)'s intervention pose a threat to credibility among international investors.
``Korea's net external position is going back to net debtor from net creditor, and there is a potential risk to undermine the confidence of market participants and potential and exiting investors in Korea simply because of the massive intervention,'' he said.
The warning came as the world's 13th-largest economy is faced with a double whammy of soaring foreign debts and falling foreign exchange reserves.
``I'm sure the BOK and the Ministry of Strategy and Finance all recognize such risks and are mindful of future policy execution. So far, the actions taken by the authorities are not significant enough to undermine our view on the sovereign credit rating of Korea,'' he added.
``However, heavy intervention in the currency market for the long period could adversely affect sovereign credit ratings, depending on the success or failure, the size, duration and impact on the Korean economy.''
In March, the country's combined debts reached $412.5 billion while credits stood at $427.4 billion _ meaning net international credit more than halved to $14.9 billion, the smallest since September 2000.
Foreign exchange reserves recorded their biggest drop in history last month, as authorities sold dollar holdings en masse to prevent the won from sliding against the greenback. Reserves stood at $247.5 billion in July, down $10.58 billion from a month ago.
Ogawa also questioned the effectiveness of Seoul's intervention policy.
``Starting intervention in the currency market is easy but it is difficult to stop it if the market movement is different from the one the central bank intended,'' he said.
The won's value has apparently stopped sliding for now, but there is no guarantee that it will stay that way, he said.
Following heavy state intervention in early July, the won appreciated to as high as 1,002.3 per dollar but has steadily lost value. The Korean currency closed at 1,017.9 won Tuesday.
``There is a question on if it is worthwhile to spend 5.8 percent of foreign reserves of the country to prop up the value of won just by 3.5 percent for a month, if indeed the BOK spent $15 billion for intervention in the market in July as the market speculated,'' he added.
On July 7, the central bank and the government jointly announced the use of foreign exchange reserves to curb a further weakening of the won to fight inflation.
Ogawa said intervention merely treats the symptoms and is not a fundamental cure.
``If the country fails to deal with the real reasons for the weaker won, not only will heavy intervention not solve the problem but it also could potentially aggravate the situation and make it more difficult to solve,'' he said.
In October last year, S&P retained its sovereign rating for South Korea at ``A,'' warning that external liabilities of the financial sector had increased at an alarming pace. The rating has been stuck at ''A'' since July 2005