South Korea Market

South Korea’s Policy For Market Volatility: Talking

South Korea’s economic policy officials probably aren’t getting a lot of sleep these days as the local markets swing wildly on each new headline about Europe’s debt crisis and the ailing U.S. economy. But while officials fret at meetings on an almost daily basis, there’s little prospect of any near-term policy steps to shield Asia’s fourth-largest economy from the sudden ebbs and flows of global capital.

Another alarm bell came on Thursday as the Korean won sank to a six-month low, prompting the Finance Ministry to make a rare “verbal intervention” to warn that the authorities are monitoring currency swings. The Bank of Korea was later suspected of selling $500 million to $1 billion worth of dollars to prop up the won. At a policy meeting Friday morning Finance Minister Bahk Jae-wan warned: “Uncertainties and volatility, which the market hates the most, continue to grow.” It’s a familiar refrain, reflecting concern that South Korea is among the countries most vulnerable to sharp swings of capital due to its open, trade-dependent economy. But for all the agonizing, there’s another more important message: Korean authorities are more concerned about further upsetting an already frazzled market by taking any fresh countermeasures against capital flows.

Korea has since mid-2010 taken three key steps to manage the destabilizing effects of so-called hot money. It capped the foreign-exchange forwards positions of banks operating onshore to limit speculation on the Korean won, resumed taxing foreigners’ investment in local bonds and created a levy on banks’ offshore debt. Local authorities say these measures have damped some of the whipsawing in local markets in recent weeks. But they also concede there’s only so much that can be done unilaterally to limit the effects of a global economic crisis and are wary of spooking investors by putting up stronger barricades. The priority for now appears to be soothing investors’ fears by emphasizing South Korea’s strong economic fundamentals at regular policy meetings, while continuing to survey market conditions. “At this point producing another step (on capital flows) could simply stoke market fears,” HI Investment economist Park Sang-hyun said. “External factors, especially conditions in Europe, are driving foreign capital flows in domestic markets so there isn’t really anything that the government can produce at this time that will calm markets.”

“The market doesn’t expect much from the government at this point even with the frequent meetings among officials, which are more about managing sentiment,” Mr. Park said. “If things get serious they can take steps like a foreign-exchange swap they got after the Lehman crisis, but at this point the best option appears to be to closely watch the situation.”