Globalization of Korea s Foreign Exchange System. Seoul Asian Financial Forum. June 4, Michael Hellbeck

Transcription

1 Globalization of Korea s Foreign Exchange System Seoul Asian Financial Forum June 4, 2012 Michael Hellbeck COO & Head of Regulatory Affairs Standard Chartered Bank Korea

2 2 Agenda Introduction to Standard Chartered Korea s Foreign Exchange System Proposed Measures

3 Standard Chartered Bank key facts 150+ years of History 75 countries, 85,000 employees 1,700 outlets & branches listed on the London, Hong Kong and Mumbai stock exchanges Market capitalisation:$56.1bn* Strong presence in Asia, Africa, and Middle East * Updated As of May 2 nd,

4 4 Franchise positioned for growth Large branch network 379 branches including 11 SME/PrB hub centers 10 WB branches and 6 PB centres 6,408 staff (13) Branch network (6) (199) (75) Consumer Banking > 4.5m customers > 1.7m Internet Banking (13) (5) (16) Wholesale Banking Growing number of corporate relationships Largest dealing room in Korea (14) (4) (10) (3) (19) Financial Holding Company (2)

5 5 Agenda Introduction to Standard Chartered Korea s Foreign Exchange System Proposed Measures

6 6 Korea: Big Economy Small Currency Korea s Status in the World GDP 11 th largest Trade > USD 1 trillion = 9 th largest FX Reserves > USD 317bn = 7 th largest Current Assessment of the FX Market Thin and narrow market relative to global FX market Korea returned to real demand principle in 2010 (corporates can only hedge underlying proven exposures) Banks subject to tight FX derivatives position caps Still many restrictions for capital account and current account transactions Emergence of a large offshore NDF market (world s largest) due to onshore restrictions Korea has a low proportion of overseas investments (9.6% in 2010) compared to Japan (22%) and Canada (39%), partly due to home bias One directional FX market as a result of unbalanced capital flows one way bet?

7 7 Korea: Big Economy Small Currency Korea remains classified as Emerging Market (MSCI EM Index) due to lack of full convertibility of KRW and lack of offshore KRW settlement ability EM investors tend to behave differently from Developed Markets investors Contributes to higher capital flow volatility Where we are right now No clear road-map for development of FX Markets No plan for liberalization of FX regulations Korean Won is still not an international currency (offshore settlement not allowed) Korean Won only partially convertible (subject to many limits and restrictions)

8 8 Korea: Historic Review of FX Liberalization 1994: Foreign Exchange Reform Plan announced 1996: OECD membership Dec 1997: Free-Floating Exchange Rate system introduced May 1998: Ceiling on foreign investment in Korean equities abolished; bond markets open to foreign investment April 1999: Introduction of FX Transaction Act Liberalization of current account transactions 1999: Real Demand Principle for FX Forward and Derivatives was abolished 2002: Plan for Development of Korean FX Market announced full liberalization of FX regulations by 2011 June 2005: Overseas Investment Activation Plan May 2006: Accelerated Foreign Exchange Liberalization Plan in 2 phases, targeting internationalization of KRW and full liberalization of FX transactions by 2009 (instead of 2011) Nov 2007: MoFE announces Measures to establish market friendly FX transaction system

9 9 FX Policy Measures since 2008 Financial Crisis Oct 2008: Government announces to postpone indefinitely the 2 nd stage of FX Liberalization Measures Jan : Introduction of Macro-Prudential measures aimed at reducing speculative inflows and outflows of foreign exchange Return to the real demand principle for companies (hedging limited to 100% of underlying exposure) Companies can only borrow FX loans / issue FX bonds onshore only for purpose of overseas usage Cap on Banks FX Forward Position Strengthened FX Liquidity ratios for Korean banks (preventing currency and maturity mismatches) Re-introduction of Withholding Tax on interest and capital gains on Korean bond investments held by foreign investors (aimed at reducing excessive inflows of hot money ) Bank Levy on offshore borrowings Unintended Consequences: Build-up of a sizable offshore NDF Market in response to onshore restrictions Bank Levy impact on supply of trade finance Policy measure proved effective as stop gap measures FX restrictions may give illusion of absolute control over FX capital flows

10 10 Effect of FX Policy Measures since 2008 The FX derivatives cap on Banks and the return to the real demand principle for FX hedging has led to a significant drop in FX Derivatives Balances of Korean Banks and Corporates

11 11 Interbank FX Market Turnover (daily averages, USD 100mn unit) Q1 Q2 Q3 Q4 Spots Forwards FX Swaps Other derivatives (including currency swaps, currency options, etc) Total Onshore Interbank FX Transaction Volume Total Offshore NDF Transaction Volume Korea s share in the global daily FX spot turnover was only 1.5% in 2010 (source: BIS), much less than AUD (7.6%) or CAD (5.3%) or even NZD (1.6%), which seems disproportionate to the size of Korea s economy

12 12 Flashback: Korea s Experience with FX Shocks Triggers of the 1997 Crisis included Currency and maturity mismatches Overreliance on external short-term debt Insufficient FX reserves (smaller than s-t debt) Excessive leverage of Chaebols Weak banking system Triggers of the 2008 Crisis included Sudden withdrawal of portfolio investors due to global risk aversion Withdrawal of short term loans due to global banks de-leveraging in 4Q2008 Both saw abrupt and massive outflow of capital, leading to sudden currency depreciation and drop in FX reserves Capital flows are pro-cyclical (surge during boom, reverse during slow-down) Korea was vulnerable due to significant reliance on short-term external debt

13 13 Rising FX Reserves since 1997 Sufficient FX reserves compared with historic peak foreign capital outflow of USD 57bn in 2008, when foreign investors withdrew USD 16bn of lending and USD 41bn worth of equity investments.

14 14 External Debt Profile Improved Between 2008 to end of 2011, total S-T external debt declined from an all-time high of USD 190bn to USD 136bn. Korean banks portion reduced from USD 67bn to USD 56bn, whereas foreign bank branches cut down their S-T offshore borrowings from USD 94bn down to USD 44bn.

15 15 Can Korea s withstand another FX shock? External Debt profile now more stable Total external debt of USD 398.4bn < FX reserves (USD 317bn) + Currency Swap lines (USD 130bn) S-T external debt ratio now down to 34% Financial Safety Net in place USD 317bn FX reserves > short-term debt of USD 136bn Oct 2011: FX Currency Swap Lines with Japan USD 70bn and China USD 60bn Changmai Initiative: Multi-lateral swap lines Korean Banking system more resilient FX Liquidity conditions have improved More term funding Sound risk management Corporate Sector de-leveraged Lessons learnt

16 16 Agenda Introduction to Standard Chartered Korea s Foreign Exchange System Proposed Measures

17 17 Globalize Korea s FX System Continue the FX liberalization path step by step - Remove remaining FX restrictions for inflows and outflows - Change all prior reporting items to BoK and MoSF into post facto reports to FX Banks Allow offshore settlement of Korean Won - This will support Korean importers and exporters by reducing exchange risks - Learn from the RMB experience Achieve Full Convertibility through full liberalization of the FX Market Pursue Internationalization of the Korean Won (= creating demand for Korean Won) Attain Developed Market Status in MSCI Index Use Macro-prudential measures to curb capital flows only on temporary basis, not permanent basis Eliminate onshore restrictions that have caused offshore NDF market rise

18 18 Risks and Benefits of KRW Globalization Risks Foreign Currency hoarding in case of a crisis Burnt by previous crisis experience Speculative FX trading activity Increased capital flow volatility Benefits Reduce exchange rate risk of enterprises Deepening of FX market Korea would be more resilient to external shocks Increase demand for KRW by residents and non-residents Koreans deserve to use their currency without restriction as they deem fit

19 19 Disclaimer The information and opinions in this report were prepared by Standard Chartered or one of its affiliates (collectively Standard Chartered"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Standard Chartered makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Standard Chartered and are subject to change without notice. Standard Chartered has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy.