BOK chief says uncertainty lingers
“Given the increasingly intertwined financial and economic linkages, the results of policy choices by major economies can have a negative impact on emerging market economies, which could eventually boomerang and end up with two-side spillovers” that also would affect developed economies, Kim said. “In this regard, individual countries should also factor in the possible spillovers to other countries in carrying out their policies.”
The comments were made during the Bank of Korea and International Monetary Fund Economic Review conference yesterday at Lotte Hotel, central Seoul.
Asian markets, particularly those of emerging economies, have seen stock market losses and currency appreciation since May after the first hint that the U.S. central bank could soon cut back its asset-purchasing program. Two of the biggest victims are India and Indonesia.
However, in an unexpected move, the U.S. Federal Reserve board at a meeting earlier this month decided to maintain its $85 billion-a-month bond buying, citing a still-fragile U.S. economic recovery.
In his welcoming remarks, the Bank of Korea governor also said emerging economies in Asia were equally responsible for the recent jitters in the market.
“Emerging economies may very well plead that the recent financial market turbulence is not of their doing,” said Kim. “But given their financial market fragilities, their lack of efforts to enhance financial resilience is in stark contrast to bold financial reforms like exchange rate liberalization following the 1997-98 Asian crisis.”
Kim argued that one of the reasons behind Asian emerging economies’ lack of growth momentum despite solid liquidity was that money didn’t go to where it should have.
“Although the abundant global liquidity helped mitigate liquidity constraints facing firms and prevent a sharp credit crunch in Asian emerging markets, liquidity failed to flow into sectors with high-growth potential,” he said. “The weakening of financial intermediation is due largely to rising counter-party risk and the shrinking supply of safe assets available as collateral since the global financial crisis.”
Kim said even though the Fed’s recent decision to hold off on the tapering of quantitative easing may provide some short-term relief to financial markets, he believes it will not fundamentally alter the volatile external conditions confronting the region.
Meanwhile, Indonesian Economic Minister Hatta Rajasa said in an interview with Yonhap News Agency yesterday that Korea and his country are discussing a currency swap line.
The Indonesian rupiah has appreciated more than 12 percent against the U.S. greenback since the beginning of the year, while the stock market has tumbled. The largest Southeast Asian market has been aggressively seeking currency swaps with the three major North Asian economies.
According to Yonhap, Rajasa said the leaders of the two countries will “specifically” discuss the currency swap when President Park Geun-hye visits Bali to attend the Asia-Pacific Economic Cooperation meeting early next month. Rajasa said the currency swap was discussed at the G-20 meeting last month in St. Petersburg, Russia, adding that the size of the swap between the two countries will be similar to Indonesia’s $12 billion swap with Japan and the one it will sign with China soon. China is expected to extend a $15 billion swap with Indonesia that expired last year when Premier Xi Jinping makes a two-day visit on Oct. 2.
In the Yonhap interview, Rajasa said combining the currency swaps with all three countries would add up to $40 billion and $50 billion. He stressed the swaps are purely precautionary measures and that Indonesia’s economy is resilient.
However, both the Ministry of Strategy and Finance and the central bank denied that discussions are under way.
“Currently, there are no negotiations regarding a currency swap with Indonesia,” said a BOK official.
Earlier this week, Rajasa made a similar comment after meeting with Indonesia’s central bank. He told reporters that after signing a currency swap with China, the Indonesian government plans to sign a currency swap worth roughly $10 billion with Korea.
On Sept. 12, after the monthly monetary policy meeting when he was asked about the currency swap with Indonesia, Gov. Kim said although there’s a discussion over stepping up economic cooperation between the two countries, he had no knowledge of a formal request for a currency swap.
BY LEE HO-JEONG [email@example.com]
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