Pulling out the stops to stop the won’s fall

The accelerated monetary tightening in the U.S. feeding a super-strong dollar has caused major routs in the Korean capital markets. The Kospi sank 3 percent to a 26-month low on Monday. The Kosdaq slipped below 700 threshold for the first time in 27 months. The two markets lost as much as 71 trillion in their market cap in a single day. The won fell 22 to the dollar to 1,431.3. The rate broke 1,430 for the first time in 13 years and six months.

Panic has been elevated. The Korean market must build resilience versus multiple shocks related to rises in interest rates and the stronger dollar. The policy rate in the United States is expected to reach 4.4 percent by the year-end as the U.S. Federal Reserve is largely projected to deliver the fourth increase of three quarters of a point in next meeting. Additional market tantrums are inevitable depending on the narrative from the Fed chair.

Authorities must act promptly if the market is skewed to one direction excessively. The government also should also fix chronic weaknesses in the economy. Electricity for one is structured to cause losses from sales when energy prices are high. Electricity rates should be raised according to the affordability of the end user.

Tourism should be promoted to address to chronic deficit in the travel balance to aid the imbalance in dollar demand and supply. Now can be the best timing amid elevated interest in Korean-made cultural content, such as drama and music.

Authorities must tighten monitoring of the nondeliverable forward (NDF) market to keep speculative forces at bay. Offshore individuals are suspected to have purchased NDFs worth 8 trillion won. An NDF is two-party private derivatives contracts on forward and spot rates in settlements mostly made in dollar. Since the only payment is made on the difference in the prices, speculators can easily kick in. Authorities must make sure the over-the-counter market does not shake the spot exchange market in Seoul.

Since Friday, the government has been announcing a slew of actions to stabilize the dollar-won exchange rate by entering a swap agreement with National Pension Service (NPS), supporting forward dollar bids by shipbuilders and coming up with incentives to bring back home investment in overseas assets. The government must ensure the polices lead to tangible effect.

Bank of Korea Governor Rhee Chang-yong in legislative hearing on Monday said the NPS overseas investment strategy should differ from when the dollar was at 1,100 to 1,200 won and when it is at 1,400 won.

Investment in Korea could be safer, given the exchange and interest rate conditions. Instead of mechanically following the preset investment portfolio guidelines, the institutional investor should adjust overseas investment according to exchange level to raise return rate.