|South Korea announced that it will be boosting dollar supply into its banking system. / Photo by: welcomia via 123rf|
South Korea announced that it will be boosting dollar supply into its banking system to make sure that businesses in their country have enough funding amid concerns on the economic impact of COVID-19 pandemic, reports business and financial news provider Reuters.
The Bank of Korea and the finance ministry said that actions are expected to inject more dollars in the market by $5 billion to $10 billion as the virus is causing a surge of US dollars and chaos in the world’s financial markets. To make this possible, the government will relax a regulation on key foreign exchange to encourage banks to supply more dollars.
The statement also reads that the “cap on foreign currency forward positions that local banks can hold will be raised to 50%” starting March 19. Currency forwards are contracts between two parties to exchange a certain amount of currency for another currency at a fixed exchange on a future date. By using this agreement, the parties are locking-in the exchange rate for a future transaction, explains the finance education platform Finance Train.
Funding for business is important because it serves as the fuel on which businesses can run. Without it, businesses struggle because of the weight of their debt.
South Korea will also raise the ceiling for foreign banks from 200% to 250%. Finance ministry’s director-general Kim Seong-wook also said other measures may also be done, such as injecting foreign exchange to improve liquidity – the ease with which one can buy and sell a financial asset.
The country’s President Moon Jae-in said in a meeting with economic policymakers that they are in a “very grave situation” not just on the economy but the aspect of disease prevention as well. He added that it is not easy to overcome the crisis on their own. The Korea Centers for Disease Control and Prevention (KCDC) has recently reported 93 new COVID-19 cases. The confirmed cases are now 8,413, Daegu as the hardest-hit city. The authorities are still on high alert and extensive checks are made on thousands of high-risk facilities, such as computer cafes, karaoke bars, call centers, hospitals, and nursing homes to control the pandemic.
Won-dollar year swaps
The finance ministry’s indirect targeted approach fell short, though, of market expectations, the daily added. A local currency dealer said that some foreign banks with branches in South Korea may have increased their dollar supply but it did not change the sentiment because what matters is giving confidence to the market that there will be enough dollars to go around. After the authorities’ announcement that it will be boosting the dollar supply, the won-dollar year basis swap reduced from -269 basis points to -223, signaling slight ease of mismatch in the dollar liquidity. A basis point is a measure used in finance to determine the percentage change in the rate or value of a financial instrument.
What led to the huge decline in the dollar liquidity is people’s “flight to safety.” Investors are forced to liquidate riskier bonds, stocks, and commodities because of the economic impact of the virus. Another factor is the rush of brokerages to secure a dollar funding. To relax funding constraints, central banks of some countries, such as Japan and India, have likewise pledged to carry out funding operations.
South Korea also mentioned industry-specific measures to help firms that are affected by the coronavirus outbreak. One of the industries they mentioned is the airline industry. The country’s air transport industry has been rated as one of the most efficient in the world but it is expected to see a loss of around 2.9 trillion South Korean won in the tourism industry if the coronavirus will continue to spread rapidly in the country. It is also expecting a decrease of 2.02 million foreign tourists, according to database company Statista.
Since 2000, the country has enjoyed a growing number of visitor arrivals from around 5.15 million 5.35 million in 2002 and 5.81 million in 2004. The number of visitor arrivals in South Korea are detailed in the following years: 2006 (6.45 million), 2008 (6.89 million), 2009 (7.82 million), 2010 (8.8 million), 2011 (9.79 million), 2012 (11.14 million), 2014 (14.2 million), and 2016 (17.24 million).
With the coronavirus outbreak, demand for Gangwon, South Korea’s potatoes also came crashing as school canteens and restaurants around the country are temporarily closed. An agricultural official in the province, who requested anonymity, said via international news organization Quartz that some 11,000 tons of potatoes from their 2019 harvest is not in storage and are at risk of rotting away if it will not reach consumers before April.
Provincial governor Choi Moon-soon has also posted on Twitter earlier this month to support the potato farmers in Gangwon. “Let’s eat clean potatoes and knock out the coronavirus!” he said. The governor even recreated a social media campaign called “PTS” K-pop supergroup BTS. A restaurant owner shared on Instagram that being a small business owner herself, she cannot imagine how difficult it must be for the farmers to throw away their crops because of the virus outbreak. The agriculture industry plays a crucial role in supplying a variety of food for people to minimize their risk and keep them healthy during the outbreak.
|Provincial governor Choi Moon-soon has also posted on Twitter earlier this month to support the potato farmers in Gangwon. / Photo by: Sergii Gnatiuk via 123rf|
South Korea money supply
As for South Korea’s money supply, it was reported at $US 2,506.642 in January 2020. This record shows an increase from the $2,481.707 in December 2019. In February 2019, the country’s money supply was $2,439,228.270. It decreased to $2,424,662.636 in April 2019 and $2,349,380.326 in May 2019. An increase in the money supply usually lowers the interest rates, which help generates more investments and put money in the hands of the consumers. Thus, an increase in the supply of money stimulates spending and businesses respond to it by increasing production and ordering more raw materials.
The move made by the South Korean policymakers has the potential to stimulate demand and drive economic growth as the nation faces the spreading coronavirus. Even just the idea that a plan is already in place can help boost economic confidence.