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BOK rolls out temporary foreign exchange relief measures as weak won persists
The KOSPI index and the won-dollar exchange rate are displayed on an electronic board in the dealing room of Hana Bank’s headquarters in Seoul, Friday. Yonhap
By Jun Ji-hye
Gov't shifts strategy to attract foreign capital as both supply and demand drive won's decline
The Bank of Korea (BOK) will temporarily ease foreign currency-related regulations and offer incentives to financial institutions in a bid to stabilize the foreign exchange market, as the won continues to face downward pressure, the central bank said Friday.
The average won-dollar exchange rate in December through Thursday stood at 1,472.2 won, the highest level since March 1998 during the Asian financial crisis, when it reached 1,488.87 won. The prolonged weakness of the domestic currency has heightened concerns over rising inflation and growing cost burdens for importers.
Earlier in the day, the central bank's monetary policy board decided at an emergency meeting to temporarily waive the foreign exchange stability levy for financial institutions from January through June next year and to pay interest on foreign currency reserve requirements during the same period.
The levy, imposed under the Foreign Exchange Transactions Act on institutions holding foreign currency liabilities above a certain threshold, raises borrowing costs. Its temporary suspension is expected to lower funding costs and increase the supply of dollars and other foreign currencies in the market.
Reserve requirements refer to funds that financial institutions must deposit with the central bank using a portion of customer deposits. Paying interest on foreign currency reserve requirements would strengthen incentives for banks to hold foreign currencies, enhance their ability to buffer foreign currency liquidity and help reduce market volatility.
“We expect easing the burden of the foreign exchange stability levy to strengthen incentives for domestic foreign currency supply,” a BOK official said. “By expanding short-term foreign currency investment options for banks, we also expect foreign currency deposits held overseas to flow back into the domestic market.”
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Despite the U.S. dollar weakening globally, the Korean won has continued to depreciate, standing out as the only major currency to decline.
The government, however, views the won's recent weakness as being driven more by foreign exchange supply and demand factors than by deteriorating economic fundamentals. Officials point to sustained dollar demand from retail investors directly investing in U.S. equities, as well as overseas investments by the National Pension Service.
As foreign currency outflows have increased while inflow channels have remained constrained, authorities are shifting their exchange rate response framework away from a focus on managing capital outflows toward measures aimed at attracting foreign capital.
This policy shift was reflected in a package of flexible adjustments to foreign exchange regulations announced Thursday by the Ministry of Economy and Finance, the Financial Services Commission, the Financial Supervisory Service and the BOK.
The package includes five initiatives designed to expand inflows of dollars and other foreign currencies by offering incentives to key market participants, including banks, exporters and foreign investors.
The most notable measure is the expansion of exporters’ access to foreign currency loans. Previously limited to capital expenditures such as equipment purchases or facility expansion, foreign currency borrowing will now also be permitted for working capital needs, including payroll, raw materials and administrative expenses. This effectively amounts to a broad easing and is regarded as the most significant change to Korea’s foreign exchange management framework since the Asian financial crisis.
The government is also moving to promote the use of foreign investor omnibus accounts, which would allow overseas investors to trade Korean stocks through local brokers without opening individual accounts in Korea, a long-standing requirement for accessing the domestic market.
Authorities believe that once foreign exchange supply and demand conditions normalize, the won can recover from its current weakness.
Market experts, however, remain cautious, noting that it is uncertain whether the wide-ranging measures will meaningfully ease supply-demand imbalances or lead to a sustained appreciation of the currency.
“The steps may support foreign capital inflows over the longer term, particularly if they align with Korea’s potential inclusion in the Morgan Stanley Capital International developed market index,” said Park Sang-hyun, an analyst at iM Securities. “However, their short-term impact is likely to be limited. Structural reforms to strengthen economic fundamentals are ultimately needed.”