By Lee Hyo-sik
Staff Reporter
South Korea has been grappling with a severe dollar shortage since last summer as foreign investors dumped local stocks and took dollars out of the country in the wake of the global credit squeeze, making the won-dollar rate fluctuate widely.
The unstable foreign exchange rate has negatively affected corporate activities and household consumption by aggravating uncertainties in the economy.
According to a prominent securities analyst here, the nation should strategically nurture the bond market to attract mid-and long-term investments from outside through product diversification and various incentives, which will greatly help stabilize the won's value against the dollar and other currencies.
In an interview with The Korea Times, Standard Chartered Securities Korea CEO David Jung said equity investments from outside tend to be short-term, adding stock investors can more readily cash out their investments and leave the country in accordance with the rapidly changing market environment at home and abroad.
The securities firm, founded in June 2008, is a unit of SC First Bank, employing 105 securities analysts, traders and support staff.
``It can destabilize the domestic currency market if international investors sell shares and take dollars out of the nation en masse. In contrast, bond investors tend to be more long term-oriented. To help ensure stability in the foreign exchange rate, we should enlarge and advance the local bond market to draw more capital from overseas,'' Jung said.
He then said now is the right time to overhaul market regulations and infrastructure, with the government set to issue state bonds worth 22 trillion won to finance 28.9 trillion won supplementary budget designed to prop up the sagging economy. The amount is in addition to the government's initial plan to sell government bonds, worth 74 trillion won, in 2009.
``Many foreign investors want to purchase bonds issued by the Korean government. With more state bonds being issued, now is a good chance to improve market regulations and the institutional framework to attract more foreign investors. The nation should also introduce a range of new products, including bond derivatives,'' Jung said.
The CEO then said the enlarged and advanced bond market here will cushion the volatile won-dollar rate and reduce market uncertainties, greatly helping businesses and households carry out economic activities.
``The government's coherent policy approach is also the key to stabilizing the currency market. In the first half of 2008, the government introduced an array of steps to encourage capital outflow, including easing of regulations on overseas real estate investment, to weaken the won and thus boost the price competitiveness of local goods overseas,'' he said.
But following the credit crisis in the United States last summer, foreign investors dumped local shares and bonds and took dollars out of the country, sharply weakening the won's value against the greenback. The depreciation of the won also hit the Korean economy hard, making it more expensive for the nation to import oil and other raw materials amid surging prices.
With such changes, the government reversed its policy stance and took measures to boost the won's value, including market intervention.
``A stable foreign exchange market is the key to overall financial market health. To do this, the government should send consistent signals to the market and enlarge the bond market to attract more long-term investments,'' the CEO stressed.
Touching on the ongoing stock market rally, Jung said the market has not yet hit bottom, predicting it will soon head downward again. ``Recent rallies are driven by ample liquidity amid low interest rates. Or they can be termed as a technical rebound, not fundamentally driven. Nobody knows when the market will come back in real terms,'' he said.
The U.S. market should come back to witness the worldwide market rebound as, despite the severe market downturn there, there is no system in the world that can replace the U.S. financial system, Jung said.
``I think the U.S. is struggling with the ongoing financial market turmoil more severely than Korea did 11 years ago. It will likely take longer than initially expected for the U.S. and the rest of the world to come back. The U.S. will rebound first and then optimism will spread to Europe and other parts of the world,'' the CEO said.
He projected that a genuine market recovery will take at least one and a half years, adding smart investors would snap up undervalued stocks toward the end of the year.
Jung then advised retail investors that those who are risk averse should continue to hold cash and take a wait-and-see attitude longer, adding gold continues to remain attractive for the time being. ``Gold prices have shot up in recent months but there is still more room for a rise. I also think that oil and other commodities are attractive. If people put money into commodities, they will realize handsome capital gains in accordance with the economic rebound
When asked about the Capital Market Integration Act, which went into effect early February, Jung said it is a step in the right direction, stressing the nation should nurture the capital market as one of its next growth engines.
``The financial industry used to play a supporting role for the manufacturing and services industries in the past. But now it is playing an increasingly important role in the economy. The sector should be seen as a crucial part of the economy that creates value and opportunities for new growth,'' the CEO noted.
The act is primarily designed to break down barriers between banks, securities firms and insurers in a bid to promote competition and thus strengthen the competitiveness of the overall financial industry. It has consolidated 11 rules and regulations in the capital market by function, not by different types of financial entities.
Regarding Korea's goal of emerging as a financial hub in Northeast Asia, he said the nation should learn lessons from the demise of Wall Street-based investment banks.
``To become a home to one of the world's most flourishing investment banking industries and other types of financial institutions, we should study why the U.S. investment banks collapsed. It is mainly because of extreme risk taking through excessive leverage. Local IB-want-to-be should put a stringent risk management regime in place and focus on merger and acquisitions and other fee-based corporate financial and consulting service businesses,'' Jung said.
He then said local investment banks should also look to foreign markets to become regional and then global players. ``There are many investment banks here but lower demand for high value-added and sophisticated products and services. To grow into a global player, they should advance into foreign markets, particularly those with huge growth potential in Asia and South America,'' the CEO said.
Regarding the government role in the development of the capital market, he stressed regulators should place top priority on creating a well-functioning marketplace and minimize direct involvement in the market process.
``But when the market fails, the government should take all possible measures to prevent it from collapsing. The capital market act also pursues a wider market opening. The government as well as all stakeholders should make an effort to attract capital from outside,'' Jung said.
The CEO said trades and other cross-border transactions account for more than 70 percent of the nation's gross domestic product (GDP), saying the government and local players should find a win-win solution for both locals and foreigners.
``An English speaking environment, deregulation and good residential and educational environments are all important to attracting foreign investors. But above all, to build a financial hub here, we should establish an institutional framework that conforms to international standards. Now is the time to improve our financial system and institutional environment to attract foreign investors,'' he stressed.
The CEO then said the government and the Bank of Korea have used the necessary policy tools to help mitigate the ongoing economic downturn, including a series of key interest rate cuts and supplementary fiscal spending.
The central bank has slashed its key rate by 3.25 percentage points over the past six months to a record low of 2 percent to lower borrowing costs to boost business activities, with the government unveiling a 29 trillion-won extra budget to boost domestic demand.
The government has set up several state funds to facilitate creditor-initiated corporate restructuring and boost the capital base of local banks to encourage them to lend more to cash-strapped companies.
``The government has taken appropriate steps to deal with the economic downturn. But the problem is the restructuring process of struggling construction firms and shipbuilders has been lackluster. It should be completed as soon as possible to prevent various side effects. With the slow restructuring, companies do not invest and consumers tighten their purse strings amid increasing uncertainties,'' Jung said.
The creditor-initiated corporate restructuring aimed at weeding out unhealthy businesses has been slow, with lenders fearing strong resistance from target companies and potentially huge non-performing loans as a result of liquidation. Many have been calling on the government to get involved directly as it did 11 years ago, following the 1997-98 Asian financial crisis.