South Korea has cast off most of the trappings of a developing economy over the past decade, but it is heading into the 2020s with a currency that is still distinctly emerging market.
The Korean won can only be directly exchanged with the dollar and the Chinese currency, with trading overseas limited to the yuan in Shanghai. What’s more, the country’s $50 billion foreign-exchange market opens for just six-and-a-half hours a day.
The country’s restricted currency-trading regime — a hallmark of many emerging markets — arguably doesn’t fit the country’s current economic reality.
“Authorities are reluctant to let the won trade offshore,” said Lee Jang Young, a former deputy governor of the Financial Supervisory Service. “They’re scared that any vulnerabilities will be exploited by foreign investors to launch ‘speculative attacks’ on our markets,” said Lee, who is now an senior adviser at law firm Kim & Chang in Seoul.
Their fears have deep roots in the Asian financial crisis of the late 1990s, when Korea’s finances collapsed as global funds pulled huge sums of money out of the country.
Many of today’s senior government officials were on the front lines in 1997, when the won lost half its value in the space of two months. They still recall being attacked in the press for failing the nation as it went cap-in-hand to the International Monetary Fund for a bailout.
The current fallout from the US-China trade war and Korea’s own spat with Japan only serve to reinforce the defensive mindset of policy makers. They have looked on with rising concern this year as exports fell month after month.
Any change to the currency regime now would also come as Korea confronts the rise of China as a rival for technical innovation, and as the country struggles to adjust to slower growth rates that are part and parcel of becoming a mature economy.
Yet change is exactly what Korea needs, according to advocates of internationalising the won like Lee, the former regulator. He argues that reducing dependence on the dollar would also lessen the risk of external shocks.
Having to exchange won for dollars before swapping into other currencies like the euro and the yen raises costs for Korean companies and complicates doing business.
Allowing the currency to trade 24 hours a day in global markets would likely see the cost of exchanging money come down, while also bringing fiercer competition for local financial firms.
As things stand now, investors must rely on derivatives contracts known as non-deliverable forwards to manage their exposure to the won offshore.
The narrow trading window for the currency in Seoul is from 9 a.m. to 3:30 p.m.
While offshore trading may bring benefits, the government has to weigh the risk of side effects, according to the finance ministry.
There is potential for significant market impact and any changes to rules should be gradual, said a senior official, who declined to be identified in line with ministry policy.
The most important development in recent years was the launch of won-yuan trading in Seoul in 2014, and its extension to Shanghai two years later. Korea extended trading hours for the won by 30 minutes in 2016.
Korea’s wariness is also reflected in its formidable hoard of international currency reserves. At more than $400 billion, they are among the 10 biggest in the world.
Despite the tight grip on currency trading, the IMF describes Korea as an “advanced economy” and the World Bank classifies it as a “high-income economy.”
The exports powerhouse is a global leader in technology and home to consumer brands that are known around the world. Its per capita income has passed $30 000 and the government recently gave up developing-country privileges at the World Trade Organisation.
Even its problems — from low inflation to a falling birth rate — have more in common with Europe and North America than emerging nations in Asia.
S&P Dow Jones Indices rates Korea as a “developed market” and FTSE Russell applies the same label to the country’s stocks and bonds.
“It’s difficult to be recognised any longer as a developing nation in international society considering our economic status,” Finance Minister Hong Nam-ki said in a televised address in October as the government gave up special privileges at the WTO following criticism from President Donald Trump.
MSCI still lumps the country among 26 emerging markets including Argentina and Indonesia, largely because of its currency policy.
The won’s near 7% slump this year, the biggest of any Asian currency by a wide margin, is a reminder to officials of its vulnerability.
The median forecast in a Bloomberg survey indicates the won will remain near current levels in the first half of next year before strengthening to around 1155 per dollar at the end of 2020, from 1186.90 on Thursday.
“It is probably too early to talk about the won as no longer an emerging-currency,” said An Young-jin, an economist at SK Securities in Seoul. “But clearly, Korean markets have become much more stable. Things are changing for sure.”
© 2019 Bloomberg