South Korea Scrambles to Stop Won’s Slide with Emergency Measures
South Korean officials rolled out emergency forex measures Thursday after the won hit eight-month lows.
Quick overview
- South Korea implemented emergency forex measures as the won hit an eight-month low against the dollar.
- The government is targeting structural dollar shortages by suspending stress tests for banks' foreign currency holdings and raising caps on currency forward positions.
- New rules will also allow exporters to use foreign currency loans for operational expenses, aiming to stabilize the currency.
- Despite these measures, concerns about political instability and economic growth may continue to pressure the won.
South Korean officials rolled out emergency forex measures Thursday after the won hit eight-month lows. The package targets what authorities are calling structural dollar shortages that have been hammering the currency.
The won closed at 1,476 per dollar earlier this week, the weakest it’s been since April. Instead of just intervening in markets directly, Seoul’s going after the underlying regulations they say are choking dollar supply.
A Finance Ministry official explained the shift. Back when Korea owed money to the world, the priority was keeping dollars out to limit external debt. Now? Korean investors are pouring money overseas, creating permanent dollar outflows. The old rules blocking inflows don’t make sense anymore.
The biggest move suspends stress tests for banks’ foreign currency holdings through June. These tests force banks to stockpile extra dollars in case markets blow up. Without that requirement, banks can release some of those dollars into circulation.
“Conservative domestic financial institutions, including banks, tend to hold far more foreign currency than required by supervisory standards,” the official said. Suspending the stress tests should free up the most liquidity among all the measures.
Seoul’s also raising caps on banks’ currency forward positions. That gives lenders more room to manage foreign currency exposure. Foreign bank subsidiaries like Standard Chartered Korea and Citibank Korea get an even bigger boost. Their cap jumps from 75% to 200%, letting them bring way more offshore dollars into Korea.
Another change loosens rules on foreign currency loans for domestic use. Exporters could already borrow dollars for facility investments after last year’s won drop. Now they can use foreign currency loans for working capital too, meaning everyday operational expenses.
The government’s targeting equity outflows as well. Foreign money has been leaving Korean stocks, putting downward pressure on the won. New measures aim to pull capital back by clarifying that foreign-listed firms count as professional investors and promoting integrated accounts for foreign money.
Presidential chief of staff Kim Yong-beom called an emergency meeting Thursday with reps from seven major conglomerates: Samsung, SK, Hyundai Motor, LG, Lotte, Hanwha, and HD Hyundai. The presidential office didn’t release details, but the focus was clearly on getting these companies to help stabilize markets.
Companies hoarding dollar earnings instead of converting them to won has been blamed for part of the currency’s weakness. Authorities have been pushing firms to step up for weeks now.
The timing’s rough. Political chaos in Seoul has investors nervous. The acting president situation isn’t helping confidence. Neither are concerns about Korean economic growth slowing down while debt keeps climbing.
Currency interventions can only do so much. If money keeps flowing out because investors don’t want Korean assets, no amount of regulatory tweaking fixes that. These measures buy time, but they don’t solve the confidence problem.
Seoul’s betting that easing restrictions will get more dollars circulating and take pressure off the won. Whether it works depends on whether the structural outflows they’re worried about actually slow down or accelerate from here.
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