Won looks lost - even as S. Korea's economy moves up

SEOUL • South Korea is heading into the 2020s with an emerging market currency, even after casting off most of the other trappings of a developing economy over the past decade, analysts say.

The export powerhouse is a global leader in technology and home to consumer brands that are world famous.

Its per capita income has eclipsed US$30,000 (S$40,700) 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.

Yet the Korean won can only be directly exchanged with the US dollar and the Chinese yuan, and trading overseas is limited to the Chinese currency in Shanghai. What is more, the country's US$50 billion foreign exchange market opens for just 61/2 hours a day from 9am.

"Authorities are reluctant to let the won trade offshore," said Mr 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 Mr Lee, now a senior adviser at law firm Kim & Chang.

Any change to the currency regime would also come as South Korea confronts the rise of China as a rival for technical innovation, and as the country struggles to adjust to slower growth rates that come with a mature economy.

Yet change is exactly what South Korea needs, according to advocates of internationalising the won like Mr Lee. He argues that reducing dependence on the United States dollar would also lessen the risk of external shocks.

Having to exchange won for greenback before swopping into other currencies like the euro and the yen raises costs for South 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.

While offshore trading may bring benefits, the government has to weigh the risk of side effects, according to the finance ministry.

South Korea's wariness is also reflected in its formidable hoard of international currency reserves. At more than US$400 billion, they are among the 10 biggest in the world.

Despite the tight grip on currency trading, the International Monetary Fund describes South Korea as an "advanced economy" and the World Bank classifies it as a "high-income economy".

The won's near 7 per cent slump this year, the biggest of any Asian currency by a wide margin, is a reminder to officials of its vulnerability. "It is probably too early to talk about the won as no longer an emerging currency," said economist An Young-jin at SK Securities in Seoul. "But clearly, Korean markets have become much more stable."

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A version of this article appeared in the print edition of The Straits Times on December 13, 2019, with the headline Won looks lost - even as S. Korea's economy moves up. Subscribe