Currency Internationalization,
The Future of
and International Monetary Reform
the International Monetary System
- Korea’s Experience and Future Issues December, 2011
Shin, Je-Yoon
SUNGSOO
EUN
Vice Minister
Director General
International Financial Policy Bureau
Ministry of Strategy and Finance
Republic of Korea
0
Contents
Ⅰ
Ⅱ
Ⅲ
Background
Internationalization of Korean Won
Issues to be discussed
1
Contents
Ⅰ
Background
(1) Current International Monetary System
Ⅱ
(2) Emerging Markets; Original Sin?
Ⅲ
(3) Policy Actions by Korean Government
(4) Needs of Currency Internationalization
2
Ⅰ- (1) Current International Monetary System
What is the problems?
Highly Volatile & Excessive Capital Flows (But, No Rules to Manage)
→ Sudden Stops and Rapid Reversals of capital flows
High Dependence on USD
→ Global liquidity fluctuations depending on US economic conditions
Development of Financial Sector
USD trillion
120
100
80
60
40
20
0
Dollar domination in FX transactions
USD trillion
Assets of world top 1,000 banks(left)
Capital derivatives transaction (right)
World GDP (left)
World trade (left)
1600
1400
1200
1000
800
600
400
200
0
Source : The Banker, World Bank, BIS
3
Source : BIS
Ⅰ- (2) Emerging Markets ; Original Sin?
Impacts on EMs – Korea’s experience
Original sin
→ Financial fragility caused by either ‘currency mismatch’ or ‘maturity mismatch’
Vulnerability to ‘twin crises’
→ $ 21.4 billion outflows(4% of GDP) in 5 months in 1997
→ $ 69.5 billion outflows(7.5% of GDP) in 4 months in 2008
Capital inflows/outflows (USD, billion)
FX rate (won/dollar) movements
1,800
Asian crisis
Global financial crisis
1,600
221.9
78.1
116.4
1,400
1,200
‘95.1
‘97.11 ’98.4
-21.4
5 months
Financial
Crisis
’08.9 ’09.1
’12.9
1,000
800
-69.5
600
4 months
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
4
Ⅰ- (3) Policy Actions by Korean Government
Measures to deal with volatile capital flows
Foreign exchange derivatives position ratio
→ ceilings on net foreign exchange derivatives position ratio of domestic banks and foreign bank
branches has been set at 30% and 150%, respectively, of their capital
Macro-prudential stability levy
→ bank levy is charged on non-deposit foreign currency liabilities at between 2~20bp, depending
on the maturities of debt instruments
Restoration of the tax on foreign holdings of KTBs and MSBs
→ withholding tax on interest income and capital gains of foreign holdings was restored
200
190
55.00
short-term FX liabilities($ billion)(left)
ratio of short-term FX liabilities(%)(right)
50.00
180
170
FX derivatives position
Macro-prudential
stability levy
45.00
40.00
160
35.00
150
30.00
140
130
25.00
120
20.00
07.12 08.3 08.6 08.9 08.12 09.3 09.6 09.9 09.12 10.3 10.6 10.9 10.12 11.3 11.6 11.9 11.12 12.3 12.6
5
Ⅰ- (4) Needs of Currency Internationalization
Problems of current IMS
Policy Response
Excessive Capital Flows
Deal with volatile capital flows
High Dependence on USD
Single currency for the multi-polar economies ?
Currency internationalization efforts
by emerging economies
is needed
for more resilient and stable
international monetary system.
6
Contents
Ⅱ
Internationalization of Korean Won
Ⅱ (1) Current Landscape of Korean Won
(2) Key Challenges for Won Internationalization
Ⅲ
(3) Way Toward Successful Won Internationalization
7
Ⅱ- (1) Current Landscape of Korean Won
Korea’s currency internationalization efforts so far
No hurdle in basic transaction of won and won-denominated current transaction
Regulations concerning capital account transactions in won to some extent
1988~1992
Contracts of won-denominated current transactions and
capital transactions were liberalized
1996
Payment and settlement of current account transactions in
won were liberalized
1999~2001
unit
of
Account
payment
and
settlement
Purchase of won-denominated securities by non-residents
was liberalized
store
of
value
contracts of capital transactions
current transactions
capital transactions
* off-shore settlement btn non-residents
Borrowings
* borrowing over KRW 30 billion
Securities purchase and issuance
* securities issuance abroad
2001~2007
Borrowing by non-residents was allowed up to KRW 30 billion
contracts of current transactions
deposits
Deposits were liberalized via ‘free won account’
2001
Exchange of won
free
reported
prohibited
8
Ⅱ- (1) Current Landscape of Korean Won
International use of the Won
Currency use in international trade of Korea
*2010, percentage of total trade
medium of exchange / unit of account
<Import>
→ won is hardly used in foreign trade of Korea
3.4
store of value
→ foreign investments in Korean Bond have
increased recently
8
5.1
USD
82.6
Euro
Purchase of KTBs by foreign Central Banks
Yen
*2008.1-2012.10, KRW billion
40000
35000
30000
Won
<Export>
35470
1.8
28194
5.5
25000
4.4
20000
15762
15000
10000
5000
85.8
7477
1224
0
08.1
3128
09.1
10.1
11.1
12.1
12.10
9
Source : Korea Customs Service
Ⅱ- (1) Current Landscape of Korean Won
Comparison with other emerging market currencies
won-denominated bonds account for only 0.6% of total EM currencies bond issuance
trading volumes of won FX derivatives are bigger than those of most EM currencies
→ Still, however, it constitutes a small amount of world total trading volumes of FX derivatives
→ the lack of hedging instruments could be a major impediment to more use of EM currencies
International bond issuance in EM currencies
*percentage of Total EM issuance
Source : BIS Quarterly Review March 2011
EM currencies: OTC FX derivatives turnover
*share percentage out of 200 percent
10
Source : BIS Quarterly Review March 2011
Ⅱ- (2) Key Challenges for Internationalization of the Won
Potentials for internationalizing Won
Demand side factors
→ Economic size, Network effects, Invoicing practices
Supply side factors
→ Domestic financial market depth, Financial openness, Policy support
Economic size : Share of World GDP (2011, %)
Korea
1.6
India
2.6
Russia
2.7
U.K
3.5
Brazil
3.6
Japan
8.4
China
10.5
Euro zone
18.8
U.S
 Takagi, 2009; Xu, 2009
21.6
0
5
10
15
20
25
Source : IMF WEO on Oct 2012
11
Ⅱ- (2) Key Challenges for Internationalization of the Won
Risks to monetary and financial stability
Increased offshore activities and offshore-onshore links
→ reducing the authorities’ control over monetary aggregates and domestic interest rates
→ straining the financial system’s ability to adequately absorb capital flows
Financial
openness
Monetary
independence
Exchange rate
stability
12
Ⅱ- (3) Way Toward Successful Won Internationalization
Balanced approach
Push forward won internationalization
→ But balanced approach is needed to ensure stability
Trade first, capital transaction second
1st step
Trade
Expanding the use of won
Capital
transaction
Macro-prudential
measures
2nd step
Full
Liberalization
13
Ⅱ- (3) Way Toward Successful Won Internationalization
Cooperation with China and Japan
Korea’s position between two huge economies ; “double edged sword”
Challenge for expanding
regional acceptance of Won
Chance for enhancing
Global use of Won
Kor-Chi-Jap’s share of global GDP (2011, %)
Export and Import Values of Kor-Chi-Jap
*2011, US$ billion
20.5
10.5
8.4
1.6
68
China
40
Japan
Korea
the rest
Source : IMF WEO on Oct 2012
Source : Ministry of Finance, Japan
Ministry of Knowledge and Economy, Korea
14
Ⅱ- (3) Way Toward Successful Won Internationalization
Payments in Won and RMB for trade between Korea and China
Use of currency swap between Korea and China (KRW 64 trillion / RMB 360 billion)
→ BOK supplies RMB liquidity to Korean banks and PBOC supplies Won liquidity to Chinese banks
PBOC
RMB
Account
of
BOK
Account
of
PBOC
Won
Won
BOK
Won
Chinese
Bank
Ask payment to the exporting company
Won
Chinese
Importing company
Korean
Banks
Won
Commodities
Korean
Exporting company
15
Ⅱ- (4) Way Toward Successful Won Internationalization
Regional Financial Cooperation (1)
Chiang Mai Initiatives Multilateralization
→ firewall for Asian countries to respond to regional crisis
Agreements in 2012
AMRO
Doubling the total size
From 120 bn US$ to 240 bn US$
Increasing the IMF-delinked portion
From 20% to 30% in 2012, and review in 2014
Lengthening the maturity
From 90 days to 1 yr(linked), to 6 mths(de-linked)
Introducing crisis prevention function
One, Simplified and Flexible
International
organization
16
Ⅱ- (5) Way Toward Successful Won Internationalization
Regional Financial Cooperation (2)
Asian Bond Market Initiative
→ develop local currency denominated bond markets
→ recycle regional savings into regional investments
New roadmap+ in 2012
Direction 1
To produce tangible outcomes,
current and critical ongoing issues need to be further developed
Direction 2
To strengthen the momentum for the ABMI discussion,
important but undiscussed issues related to bond markets should be added
Direction 3
To meet and accommodate the changing global financial needs,
including mitigation of volatility in the capital flow, relevant issues need to be addressed
17
Contents
Ⅲ
Issues to be discussed
(1) Sequencing issues
Ⅱ
(2) The Benefits and Costs of Currency Internationalization
Ⅲ
(3) The Role of Capital Flow Managements
(4) Currency Cooperation at the Regional Level
18
Ⅲ-(1) Sequencing Issues
Pre-requisite steps to successful currency internalization
Are Asian emerging countries ready for currency internationalization?
What is needed to facilitate the process towards currency internationalization?
19
Ⅲ-(2) The Benefits and Costs of Currency Internalization
Benefits
Costs
 Eliminating the exchange rate risk
in external transactions
 Restricting the pursuit of domestic
monetary policy
 Reducing the need for large foreign
exchange reserves
 Worsening the problems caused by
excessive capital inflows
Is it good for emerging market countries to push forward their currency internationalization?
How can we maximize the benefits and minimize the costs?
20
Ⅲ-(3) The Role of Capital Flow Management
Advanced Countries
 Capital volatility caused by pull factors
(differences in growth rates and
interest rates etc.)
Emerging Market Countries
Capital Flow Management
(CFM)
 Capital volatility cased by push factors
(spillovers of advanced countries’
expansionary monetary policies)
 Prudent macro-economic policy first,
CFM as the last resort
 CFM complementing macro-economic
policies (No sequence in both)
 Overall and mandatory
capital liberalization
 Sequential capital liberalization
(Reducing negative impacts of capital
liberalization is first)
Is CFM helpful for Emerging Markets’ currency internationalization and stable IMS?
Is it possible to develop a global rule to manage capital flows?
21
Ⅲ-(4) Currency Cooperation at the Regional Level
Short-term
Long-term
 Use of local currency
for local trade settlement
 Asian common currency?
(Lessons from the Eurozone crisis)
Asian
Monetary
Unit
How can we establish effective local currency trade settlement system in Asia?
Is it desirable or realistic for Asia to have a single currency?
22
Thank you !!
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