[THE INVESTOR] The South Korean currency market has remained calm despite Japan’s decision to suspend talks on a currency swap on Jan 6 with economists and experts saying the halt has limited impact.
Song In-chang, deputy finance minister, played down a possible repercussion of the suspension of the bilateral currency swap deal, saying that “It wouldn’t have much impact as it is not like an existing program ended.”
Other experts also pointed out that a currency swap with Japan is not vital considering South Korea’s ample foreign reserve and other swap deals with countries like China and Malaysia.
They also noted that the negotiation had already been predicted to be difficult considering the deal having been politically influenced in the past.
Some, meanwhile, also said that extra swap programs would still be a safety net for Korea as it enables each nation to secure dollars from the other in exchange for their own currency during financial emergencies.
“Putting aside political agendas, a currency swap between Korea and Japan is economically beneficial, ”Rye Keun-kwan, economics professor at Seoul National University, had said in previous news reports. “Therefore, it is not right if the deal is suspended due to political reasons.”
Korea’s foreign-exchange holdings stood at $371 billion as of the end of December, according to the Bank of Korea data.
Japan on Friday announced that it was withdrawing from the talks on the Korea-Japan currency swap citing Korea’s decision to let a statute symbolizing the victims of Japan’s wartime sexual slavery be built in front of its consulate building in the southern port city of Busan.
Korea had proposed to resume negotiations on the swap deal with Japan, the world’s second-largest foreign currencies holder, on a foreign-exchange reserve of more than $1.2 trillion. The two nations reopened negotiations in August last year after the previous currency swap deal expired in February 2015 amid chilly bilateral relations over historical and territorial issues.
South Korea has swap deals with United Arab Emirates, Malaysia, Australia and Indonesia. It is also part of the multilateral currency swap deal called Chiang Mai Initiative, an emergency dollar liquidity facility created after the 1997 Asian currency crisis among South Korea, China, Japan and the Association of Southeast Asian Nations. The countries will discuss the expansion of the CMI in May in an attempt to prevent another currency crisis.
However, South Korea needs to strengthen its readiness for turbulence in global markets nonetheless, market watchers said.
Amid strengthening dollars, many countries are trying hard to defend their currencies. The foreign reserves around the world plunged by 10 percent when compared with the volume in July 2014. The foreign reserves had increased after the financial crisis in 2008 and 2009 until it began to decline in mid-2014.
Leading the trend is China. The foreign reserve of the world’s second-largest economy dropped by $41.08 billion to $3.15 trillion as of December 31, 2016, according to the People’s Bank of China on Saturday. It is the lowest level since March 2011. The People’s Bank of China said efforts to stabilize its currency are the main reason for the drop in the foreign reserves.
The currency swap program between Korea and China worth $56 billion is set to expire in October. The two countries could face bumpy negotiations in renewing the swap deal amid political tension over Korea’s decision to station the US Terminal High Altitude Area Defense in the country.
By Park Ga-young/The Korea Herald (firstname.lastname@example.org)