Korea may get off U.S. FX monitoring list soon

A KEB Hana Bank employee counts dollars at the bank’s office in central Seoul on Wednesday. [NEWS1]

Despite earlier predictions, Korea remained on a list of countries monitored by the U.S. government for potential currency manipulation.

But Washington hinted Korea may be dropped soon.

The U.S. Treasury Department on Tuesday announced its semiannual Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.

Korea was included among nine U.S. trading partners that were on a monitoring list for currency manipulation along with China, Japan, Germany, Italy, Ireland, Singapore, Malaysia and Vietnam.

Since the last report released in October 2018, five new countries were added (Italy, Ireland, Singapore, Malaysia and Vietnam) and two dropped (India and Switzerland).

According to the report, Korea met one of three criteria to be under surveillance by the Treasury Department and in the future could be dropped.

“The authorities should continue to limit currency intervention to only exceptional circumstances of disorderly market conditions, and Treasury will continue to closely monitor Korea’s currency practices,” the U.S. Treasury said in the report. “Given that Korea now only meets one of the three criteria from the 2015 Act, Treasury would remove Korea from the Monitoring List if this remains the case at the time of its next Report.”

Korea’s current account surplus was 4.7 percent of its GDP last year, exceeding 2 percent, the criteria it continues to meet.

But its trade surplus with the United States was $17.9 billion in 2018, which is less than $20 billion needed to be monitored. And its government’s interventions in the foreign exchange market were less than the 2 percent of GDP required to be monitored. According to the treasury department, the Korean government only engaged in foreign exchange interventions equivalent to 0.2 percent of its GDP.

“Treasury assesses that on net over 2018 the [Korean] authorities intervened modestly to support the won,” the treasury report stated. It added that it welcomed Korea’s first disclosure of its foreign exchange intervention, which was released in March.

“Treasury supports the authorities’ ongoing plans to report foreign exchange intervention in a more transparent and timely manner,” the Treasury Department report stated.

The latest U.S. government’s report cast a wider net.

Previously only 12 of the United States’ largest trading partners were considered for review. But starting with the latest report, any trading partner that has bilateral trades with the United States exceeding $40 billion will be reviewed.

There are three criteria in judging whether a trading partner is committing currency manipulation in Washington’s view. One is having a trade surplus with the United States exceeding more than $20 billion. This threshold has remained unchanged.

However, the threshold on the current account surplus has been raised. Previously, Washington maintained that the current account surplus of a trading partner should not exceed more than 3 percent of its GDP in order to avoid even being on the monitoring list. That bar has been lowered to more than 2 percent.

Additionally, the government’s intervention in the foreign exchange market should not exceed 2 percent of the GDP with persistent net purchases in a period of between eight to 12 months.

While the 2 percent remains the same, the months of persistent net purchases have been narrowed to six to 12 months.

“Treasury’s goal in adjusting the coverage of the Report and these thresholds is to better identify where potentially unfair currency practices or excessive external imbalances may be emerging that could weigh on U.S. growth or harm U.S. workers and business,” the report stated.

The U.S. government said Korea should continue with policy reforms that would strengthen Korea’s domestic market.

It added that Korea should push forward with labor market reforms.

“Structural measures will be required to increase potential growth,” the report stated. “Korea could do more to support labor force participation by pairing new budget initiatives with comprehensive labor market reforms that reduce restrictions on laying off regular workers and incentivize hiring non-regular workers.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]