[EDITORIALS]A drop in the bucketThe government announced that it would “mobilize all capabilities to quickly stabilize the foreign exchange market and to minimize negative effects on the Korean economy” as the won soared to an eight-year high. As part of the measures, the government said it would abolish the ceiling on Koreans’ individual purchases of real estate overseas for residences and limits on individual direct investments in foreign countries within the year. The government intends to reduce upward pressure on the won by lowering barriers on capital flows to foreign countries.
From a long-term view, it is basically right to liberalize overseas investments, whether it is for purchases of houses abroad or buying foreign companies’ stocks. The doors of inward investment opportunities in Korea have long been opened, while many doors that led to foreign investment markets remained locked, causing distortions in economic transactions. And unless flows of foreign currencies are liberalized, it will be difficult to stabilize the foreign exchange market in the long run.
But it is doubtful whether these measures will be effective. The purchases of overseas real estate by Koreans in the last six months amounted to less than $10 million. The amount is trivial compared to Korea’s monthly trade surpluses in the billions of dollars and foreigners’ investments in Seoul stock markets. In addition, the real estate markets of the United States and China are cooling down. Considering that there is risk resulting from foreign exchange rate fluctuations, Korean individuals will be cautious, so it is unlikely that individuals’ overseas real estate purchases or direct investments will jump immediately because the limits have been removed. So the dollar rebounded against the won only for a few hours yesterday, and then fell again to close up only slightly.
The government should end these knee-jerk reactions whenever the local currency strengthens sharply. Two years ago, the foreign exchange authorities intervened in the market without careful preparations to curb the won’s rise, and lost a bundle of money. If the government is not calm, local companies and financial institutions will hurriedly sell dollars and exchange rates will overshoot.
A better long term step would be to relax not only restrictions on individual investments abroad but also on corporate investment. Seoul should also improve the competitiveness of its foreign exchange market, because speculation is not easy in efficient markets like those of Hong Kong and Singapore.