Can Korean won become key currency?

From left, Lee Jae-myung of the ruling Democratic Party of Korea, Ahn Cheol-soo of the People's Party, Sim Sang-jung of the Justice Party and Yoon Suk-yeol of the main opposition People Power Party. Yonhap

Lee's remarks spark debate among politicians, netizens

By Anna J. Park

The very first TV presidential debate hosted by the National Election Commission sparked controversy over whether the Korean won could become a key currency, with some criticizing the idea as unrealistic and even ignorant, while others said it reflects Korea's developed economic status.

In the much-spotlighted TV debate on Monday, the four presidential candidates continued to bicker over various economic and monetary policies. One of the most controversial remarks during the debate, which heated up online communities and social media, was ruling Democratic Party of Korea candidate Lee Jae-myung's comment that the Korean won could become a key currency.

A key currency refers to a currency that is stable and provides the foundation for exchange rates in international transactions, thereby facilitating the setting of other currencies' values, such as the U.S. dollar and the euro.

Responding to People's Party candidate Ahn Cheol-soo's question on the appropriate scale of national bond issuance and a key currency, Lee said that given the status of the Korean economy, its currency could be included in the global key currencies. Countries that issue key currencies, such as the U.S. and the EU, tend to bear a lighter burden from national debt thanks to their power to issue a key currency.

Lee continued to argue that the Korean won has a high chance of being included as a key currency, and said there remains room for issuing more government bonds or debt. Regarding the remark, both main opposition People Power Party candidate Yoon Suk-yeol as well as Ahn Cheol-soo refuted it, raising voices of concern over the national debt.

After the debate, the main opposition party criticized Lee's remarks, saying they lack a realistic approach. The ruling party later explained that Lee's comment is based on a press release by the Federation of Korean Industries (FKI) earlier this month.

In the press release, the FKI presented five reasons why the Korean won could be included in the currency basket comprising International Monetary Fund (IMF)'s Special Drawing Rights (SDR). SDRs are an artificial currency instrument created by the IMF in late 1960s to be used in internal accounting. The current weighted basket is comprised of the U.S. dollar, the euro, the British pound, the Japanese yen and the Chinese yuan.

Market watchers point out that the concept of key currency is not identical with the inclusion in the SDR currency basket, although inclusion in the SDR basket could signify that a country's currency has earned a more trusted status internationally. The FKI also released official statements on the matter, saying that its previous press release on SDR aims to deliver the business group's hope that the Korean won could be included in the SDR basket.

“Even if the Korean won gets to be included in the SDR basket, it doesn't translate into an immediate surge in the global demand for Korean won-denominated bonds,” the FKI statement reads.

Market experts say a requirement for becoming a key currency state not only includes economic considerations, but also considerations of a country's political and military power. According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT) ― which releases monthly statistics of global payment and securities trade transactions ― the weight of the Korean won in international transactions wasn't listed among the top 20 global currencies.

“I think there is a possibility of the Korean won becoming one of key currencies in the distant future, dozens of years from now, with much effort and development. However, the possibility of achieving this goal within a single five-year government term would be very, very low,” a market expert said on the condition of anonymity.

“Lee's remark also lacks specific directions on how to achieve the goal, and it's very doubtful whether global powers would be willing to share their monetary hegemony. Inclusion in the SDR basket itself is a very rigorous process, although inclusion itself doesn't mean that the currency becomes a key currency,” the expert continued, adding that the Korean stock market doesn't even have advanced market status in the MSCI index yet. The fact that the country's GDP only accounts for about two percent of the global economy also makes the issue more unlikely, as of now.

Besides this issue, the presidential candidates shared conflicting views on how to achieve an optimal policy mix between monetary and fiscal policies, which seem to have gone astray from one another. While the government is seeking expansionary fiscal policies, the Bank of Korea is moving to raise its key interest rate gradually throughout the year.

While People's Party candidate Ahn criticized the government's expansionary fiscal policies, which are not in line with the central bank's direction, ruling party candidate Lee said the government's fiscal policies weren't good enough compared to other countries' more lenient COVID-19 measures for the economy. Main opposition candidate Yoon said that the current situation is exceptional, as the government's proactive fiscal policies are aiming to support the hard-hit economy.