Deal with Malaysia the latest currency swapThe Korean central bank has been aggressively seeking bilateral currency swaps with resource-rich emerging economies.
The goal is to lower the country’s dependence on the U.S. greenback for trade settlements.
Malaysia was the latest emerging economy to sign a currency swap deal with Korea.
Both the Bank of Korea and the Bank Negara Malaysia announced on Sunday that a bilateral agreement that allows the exchange of local currencies of 5 trillion won ($4.7 billion), or 15 billion ringgit, was reached.
A statement by the central banks said the bilateral currency swap agreement is valid for three years and could be extended by mutual agreement.
Both central banks stated the currency swap deal is aimed at encouraging the use of local currencies in bilateral trades while strengthening financial cooperation.
“I am sure the currency swap agreement between Korea and Malaysia will be an important stepping stone in balancing the strength of our bilateral ties between the real and financial sectors, leading to ever closer economic cooperation,” said Korean central bank Gov. Kim Choong-soo in Kuala Lumpur.
“As the region moves toward greater integration, this currency swap arrangement will contribute toward further strengthening the economic and financial inter-linkages between the two countries,” said Malaysian central bank Gov. Zeti Akhtar Aziz. “With this arrangement, firms from both countries will now have greater flexibility to use local currency for settlement of their bilateral trade and investment activities.”
This month alone, the Korean central bank signed bilateral currency swap agreements with Indonesia and the United Arab Emirates (UAE). Announcements of those agreements were made back to back while the Korean finance minister and central bank governor were attending the annual International Monetary Fund and World Bank’s summit in Washington.
Korea now has the largest currency swap with Indonesia - 10 trillion won or $10 billion.
Experts say the wider use of won as a trade settlement, especially with countries with large natural resources, will contribute significantly to lowering the risk of currency exchange.
A report released by the Organization for Economic Cooperation and Development earlier this month showed Korea ranked highest among the Group of 20 economies on trade dependency.
Korea’s trade dependency as of 2011 was 110.3 percent of gross domestic product. Germany was second with 95.2 percent. China’s is 50 percent, and Japan’s 31.4 percent.
Supported by the weak Korean won against the U.S. dollar, major Korean companies like Samsung and Hyundai Motor expanded their presence in the global market after the global financial crisis of late 2008.
As a result, Korea has become one of the countries most affected by the fluctuation of the U.S. greenback.
Indonesia is Korea’s eighth-largest trading partner at roughly $30 billion annually, while Malaysia ranks 17th at $17.5 billion.
The currency swap deals may not end with Malaysia. According to Reuters, Korean Finance Minister Hyun Oh-seok yesterday said Korea is considering a currency swap agreement with Australia, although he reportedly added that negotiations have not progressed much.
While meeting with Korean reporters in Washington on Oct. 12, the finance minister said there are still a few more countries that Korea is in discussion with over currency swaps.
“Although I cannot tell you the name of the country, we are currently talking with several resource-rich countries,” Hyun said. “This includes emerging markets that have a lot of trade with Korea.”
The finance minister stressed that currency swaps were being pursued to turn the Korean won into a major trade settlement currency.
“One day, it will truly will become an international currency,” he said.
BY LEE HO-JEONG [firstname.lastname@example.org]