By Lee Hyo-sik
Staff Reporter
South Korea will not issue foreign exchange stabilization bonds this year in a bid to curb the local currency's recent rise against the greenback, according to the Ministry of Strategy and Finance, Tuesday.
A senior ministry official, who did not want to be named, told The Korea Times that the government will not sell currency bonds in the first half of 2010, adding that if the won continues to gain ground against the dollar toward the year's end, it will not seek to bring extra dollars into the country at all.
The government can issue foreign currency denominated-bonds worth up to $2 billion this year. It sells sovereign bonds overseas to secure dollars to intervene in the domestic foreign exchange market and to keep the value of the won low in an effort to boost exports and improve the current account balance.
In 2009, it sold only $3 billion in currency stabilization bonds out of the annual ceiling of $6 billion on improved foreign exchange liquidity conditions.
"We will not issue currency stabilization bonds during the first half of the year. We have not yet decided whether or not to sell notes in the latter half. But if the local currency remains strong against the greenback, it is not desirable to increase the amount of dollars here," the official said.
He said foreign exchange stabilization bond yields usually serve as a yardstick for other locally issued bonds abroad by banks and public companies. During the global financial market turmoil, it was uncertain and costly for banks and firms to issue bonds overseas without the standard yield.
"But the credit default swap (CDS) premium charged on domestic corporate bonds has dropped to record-low levels. There is no need for us to set a benchmark yield this year, given improving international financial market conditions," the official said.
Additionally, the snowballing foreign exchange reserves have discouraged government officials from bringing dollars into the country. Korea's currency reserves reached $272.3 billion in March, up $1.67 billion from February. In January, it hit a record high of $273.7 billion.
The downsized bond issuance reflects a sharp turnaround from late 2008 when policymakers here scrambled to sell currency stabilization bonds abroad to raise much-needed dollars, with foreign investors taking dollars out of the country en masse after the collapse of Lehman Brothers.
In September 2008, the government sought to sell sovereign bonds worth $1 billion to foreign investors but failed to do so because they demanded much higher yields.
But with the easing of the global financial crisis in mid-2009, foreigners have returned to local stock and bond markets, bringing massive amounts of dollars into the country.
Coupled with the nation's soaring trade surplus, it has strengthened the value of the Korean won, making it cheaper to import various goods and raw materials from abroad. Yet it has chipped away at the price competitiveness of Korea-made products in overseas markets.
On Monday, the Korean won closed at 1,114.1 won against the greenback, the strongest level in months due to the dollar weakening caused by rising expectations of the Chinese yuan revaluation.