Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Gov't eases FX rules to boost dollar liquidity
Finance Minister Hong Nam-ki, center, speaks during a meeting to discuss economic impacts of the coronavirus in Seoul, Wednesday. Courtesy of Ministry of Economy and Finance
By Lee Min-hyung
KOSPI plunges 4.86% to 1,591.2 on foreign selloff
By Lee Min-hyung
The government has decided to ease the upper limit for local and foreign banks' foreign currency forward positions to secure sufficient dollars from the currency swap funding market, the Ministry of Finance and Economy said Wednesday.
The move, which will be effective from today, was a preemptive step to fend off growing worries of a dollar funding shortage here.
Under the readjusted rule, the ministry raised the ceiling for local banks from 40 percent of their equity capital to 50 percent. The cap will also rise to 250 percent from 200 percent for foreign lenders, the finance ministry said in a statement jointly released with the Bank of Korea (BOK)
The measure is widely expected to allow banks to supply more dollars to local firms at a time when they face setbacks in securing them amid a recent mass exodus of foreign capital from the local stock market due to concerns over the COVID-19 pandemic.
“We decided to raise the cap by 25 percent in a bid to mitigate an imbalance in supply and demand (of dollars) on the swap market,” the ministry said in a statement.
The government started setting caps on foreign currency positions in 2010 to block banks from borrowing excessive amounts of foreign currency. The position refers to a ratio of a bank's forward exchange to its equity capital. This enables lenders to exchange a specific amount of one currency for another one at a fixed exchange rate on a fixed future date.
However, the government's stabilization measures failed to revitalize investor sentiment here. Foreigners extended their massive selling spree for the 10th straight day, dumping local stocks worth 585 billion won on the main bourse Wednesday.
The benchmark KOSPI plunged by 81.24 points or 4.86 percent to close at 1,591.2. The index fell below the 1,600 mark for the first time in nearly 10 years since it ended at 1,582.12 on May 26, 2010. The tech-heavy Kosdaq nosedived 5.75 percent to 485.14.
The local currency also lost more ground against the greenback closing at 1,245.7 won per dollar, down 2.2 won from the Tuesday close, and the weakest level since June 11, 2010.
Experts said it remains to be seen how effective the latest measure will be in terms of stabilizing the volatile foreign exchange market.
“It is a clearly positive signal for the government to make such an announcement, as the message that the authorities are making efforts, in itself, has the effect of stabilizing the market,” said Korea Capital Market Institute economist Kim Han-soo.
“While implementing the measure, however, the government also has to pay close attention to maintaining its foreign reserves in a stable manner,” he said.
During the 2008 global financial crisis, the local foreign exchange market leveled off shortly after the BOK reached a currency swap deal with the United States Federal Reserve, he noted.
“If the global economy is disturbed to a similar level as that in 2008, the BOK should also forge more ties with central banks around the world to set up a currency funding system,” he said.
The latest step by the financial authorities is primarily aimed at preventing any additional withdrawal of foreign capital, and blocking the local currency from losing more ground against the dollar, an official from one of the major commercial banks said.
“Our view is the decision will help stabilize the current volatility on the foreign exchange market to some extent,” the official said.
The finance ministry also noted it would continue to keep a close eye on the currency swap market, and hinted at the possibility of introducing further measures if market volatility persists.