[VIEWPOINT]Take care maneuvering won valueThe government has drastically loosened restrictions on foreign exchange transactions in order to allow the flow of U.S. dollars out of the country and reduce pressure on the falling won-U.S. dollar exchange rate that has fallen to 960-970 won per dollar. The recent exchange rate fall is due to a macro-economic reason of surplus in both current and capital accounts simultaneously and a micro-economic reason of a net increase in the purchase of stocks by foreigners. The cost of safeguarding the exchange rate is itself a serious economic burden in a situation where we possess over $100 billion in foreign exchange reserves, so it is necessary to change policy drastically. The government action this time has changed the direction of policy to reducing chronic excess in the supply of U.S. dollars by stimulating foreign investment by individuals and business corporations, rather than trying to safeguard the rate by way of the foreign exchange authority directly purchasing more currency from the foreign exchange market.
The government has recently liberalized the purchase of overseas residential real estate. Also, the amount of overseas loans that business corporations have to repatriate is increased to more than $500,000 per contract, from $100,000. The period of repatriation ― currently 1 year and 6 months ― will also be extended to 3 years. Therefore, companies will be freed from the burden of the mandatory collection of loans they have overseas, and will be able to carry out overseas sales activities more freely. In addition, the limit on individuals’ direct foreign investment has been abolished and the limits on domestic funds’ investment in foreign funds have been loosened, to activate investments in foreign portfolios. Also, foreign currency positions of foreign exchange banks have been raised from 20 percent to 30 percent of their capital at the end of previous month, in an attempt to expand the foreign exchange market. Since Korea is a country that lives on exports, it is vital to safeguard the exchange rate by adjusting the balance of capital accounts. Therefore, the government measures this time seem to be appropriate policy alternatives that can considerably increase the flexibility and depth of exchange rate protection.
However, there are negative evaluations, too. First of all, there is a concern that the measure taken this time is not only insufficient to relieve the structural imbalance in the demand and supply of foreign currency, but also has a chance to encourage an illegal and expedient outflow of foreign currency, rather than normal foreign investments. We should also be wary that frequent changes in foreign exchange policy may result in widening the range of foreign exchange rate fluctuation and the possibility of speculative investment in foreign currency.
The grounds for opposition to the government measures are as follows. Although we can send up to $1 million out of the country to buy a house overseas now, the average amount of remittances made between January last year and February 15 of this year was only $360,000 in each case, so the effect of abolishing the remittance limit for the purchase of a house overseas is expected to be minor. In 2005, export contracts that amounted to less than $500,000 took up 56 percent of corporate exports. Therefore, exempting the remittance of export earnings under $500,000 could end up encouraging the illegal purchase of overseas real estate by corporations.
There is also a chance that the loosening of restrictions, if it overshoots, may bring about a sudden reversal in the demand and supply of foreign exchange. In other words, if the surplus in the capital accounts suddenly turns to a deficit due to a rapid decrease of the surplus in the current account, as started this year, there is a possibility that the exchange rate will rise instead of falling.
However, if the twin deficits of the United States are not relieved, and the U.S. Federal Reserve System does not continue to raise interest rates, the trend of a strong Korean won versus a weak U.S. dollar will not change. Ultimately, the government and the private sector have to form a common front in order to prevent a sudden drop in the exchange rate. The government does not have confidence in solving the problem through the market as it still has worries. Safeguarding the exchange rate is no exception. Now that corporate management has become more transparent, foreign investment by corporations can be a good way of relieving the concentration of dollars in the country.
The first step of the “lost 10 years” of Japan was the Plaza Agreement of 1985. The Plaza Agreement turned a $1 to 240 yen exchange rate to $1 to 143 yen in just two years, appreciating the value of the yen by 67 percent. Japan made various self-help measures in a “squeeze the dry cloth again” method, but ended up losing 10 years.
There is a lesson to be learned from the Japanese experience. In order to avoid the sudden appreciation of the value of the Korean won, we need to increase the number of participants in the foreign exchange market. We also need to enhance productivity to overcome the trend of the strong won.
* The writer is a professor of economics at Myongji University. Translation by the JoongAng Daily staff.
by Cho Dong-keun