Won-Dollar Exchange Rate May Test 2,000
`Reserves Not Enough to Protect Korea's Financial Assets'
By Kim Jae-kyoung
Staff Reporter
A noted global economist said that the global investors' risk aversion and weak economic activity will put growing upward pressure on the won-dollar exchange rate, possibly driving the pair to an all-time high of 2,000.
In an interview with The Korea Times, ING Group Asia chief economist Tim Condon said that Korea is victimized by a bout of risk aversion arising from high policy risk and pessimism about economic prospects in the United States.
``Contagion is spreading to all financial assets and Korea's high level of short-term debt plus maturities due within one year is too high in relation to reserves to immunize Korea's financial assets from the contagion,'' he added.
``Last week, the fear among U.S. investors started to resemble panic. If it indeed turns into panic, I would expect the won-dollar rate to re-test its all-time high close, 1,962.50, reached Dec. 23, 1997,'' he added.
He pointed out that Korea's past experience suggests that a ratio of currency reserves to short-term debt plus maturities due within one year is still a bit too low to insulate from contagion during bouts of global financial market panic or near-panic.
``Exactly what is the minimum threshold needed to confer immunity from contagion is difficult to answer. But on the face of things, one is too low,'' he said. ``I think investors want additional cushion beyond 100 percent reserve coverage. Perhaps an additional 25 percent is sufficient. So foreign reserves of $242 billion.''
The nation's short-term debt plus maturities due within one year came to $194 billion in December, which is equivalent to 96.4 percent of the nation's currency reserves, standing at $201.5 billion at the end of February.
He said global credit agencies such as Moody's and S&P will put their sovereign ratings, A2 and A, respectively, under review for downgrade within three months, citing financial sector instability.
Regarding the government's response to market volatility, Condon said that although it is taking proper measures, it will be impossible to deal with it with such measures as the ongoing turmoil is being triggered by external factors.
``The authorities are doing a good job. They are getting their story out there, which is that they have enough money to avert a payments crisis, especially when you consider the trade surplus likely in 2009,'' he said.
``The problem is not really a Korea problem so they cannot solve it themselves. The measures they're employing can help contain the worst of the selling pressure until greater calm returns,'' he added.
Condon, who monitors Asian financial markets including Korea, recommends that the government slash the corporate income tax to stabilize the currency market.
``One other thing the authorities could do to increase the attractiveness of risky Korean assets would be to cut the corporate income tax,'' he said.
``Instead of phasing in the 10-point cut over five years, the government could do it effective immediately. Better still, cut the top personal and corporate income tax rates to 20 percent,'' he added. ``The after-tax return on capital would go up, which would attract foreign capital inflows.''