1. the International Monetary System
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Currency Internationalization,
and International Monetary Reform
- Korea’s Experience and Future Issues -
The Future of
the International Monetary System
December, 2011
Shin, Je-Yoon
Vice Minister
SUNGSOO EUN
Director General
International Financial Policy Bureau
Ministry of Strategy and Finance
Republic of Korea
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2. Internationalization of Korean Won
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Contents Ⅰ
Background Ⅱ
Internationalization of Korean Won Ⅲ
Issues to be discussed 1
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3. Background Contents Ⅰ Ⅱ Ⅲ (1) Current International Monetary System
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Contents Ⅰ
Background
(1) Current International Monetary System
(2) Emerging Markets; Original Sin?
(3) Policy Actions by Korean Government
(4) Needs of Currency Internationalization Ⅱ Ⅲ 2
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4. Development of Financial Sector Dollar domination in FX transactions
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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
Dollar domination in FX transactions
USD trillion
Source : The Banker, World Bank, BIS 3
Source : BIS
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5. Ⅰ- (2) Emerging Markets ; Original Sin?
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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
‘95.1
‘97.11
’98.4
’08.9
’09.1
’12.9
78.1
221.9
116.4
-21.4
-69.5
Financial
Crisis
Asian crisis
Global financial crisis
5 months 4
4 months
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6. Measures to deal with volatile capital flows
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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
FX derivatives position
Macro-prudential
stability levy 5
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7. Problems of current IMS
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Ⅰ- (4) Needs of Currency Internationalization
Problems of current IMS
Policy Response
Deal with volatile capital flows
Excessive Capital Flows
Single currency for the multi-polar economies ?
High Dependence on USD
Currency internationalization efforts
by emerging economies
is needed
for more resilient and stable international monetary system. 6
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8. Internationalization of Korean Won
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Contents
Internationalization of Korean Won Ⅱ
(1) Current Landscape of Korean Won
(2) Key Challenges for Won Internationalization
(3) Way Toward Successful Won Internationalization Ⅱ Ⅲ 7
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9. Korea’s currency internationalization efforts so far
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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
unit of
Account
Exchange of won
contracts of current transactions
contracts of capital transactions
payment
and
settlement
current transactions
capital transactions
* off-shore settlement btn non-residents
store
value
deposits
Borrowings
Securities purchase and issuance
1996
Payment and settlement of current account transactions in
won were liberalized
1999~2001
Deposits were liberalized via ‘free won account’
2001
Purchase of won-denominated securities by non-residents
was liberalized
* borrowing over KRW 30 billion
* securities issuance abroad
2001~2007
Borrowing by non-residents was allowed up to KRW 30 billion
free
reported 8
prohibited
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10. Ⅱ- (1) Current Landscape of Korean Won
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Ⅱ- (1) Current Landscape of Korean Won
International use of the Won
Currency use in international trade of Korea
medium of exchange / unit of account
→ won is hardly used in foreign trade of Korea
store of value
→ foreign investments in Korean Bond have increased recently
*2010, percentage of total trade
<Import>
Purchase of KTBs by foreign Central Banks
* , KRW billion
1224
3128
7477
15762
28194
35470
12.10
<Export> 9
Source : Korea Customs Service
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11. Ⅱ- (1) Current Landscape of Korean Won
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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
EM currencies: OTC FX derivatives turnover
*percentage of Total EM issuance
*share percentage out of 200 percent 10
Source : BIS Quarterly Review March 2011
Source : BIS Quarterly Review March 2011
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12. Ⅱ- (2) Key Challenges for Internationalization of the Won
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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, %)
“Efforts to create international demand for the Korean won were hampered due to established practices of pricing and invoicing trade in U.S. dollar and European currencies.”
Takagi, 2009; Xu, 2009 11
Source : IMF WEO on Oct 2012
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13. Risks to monetary and financial stability
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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
Exchange rate
stability
Monetary
independence 12
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14. Expanding the use of won
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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
2nd step
Trade
Expanding the use of won
Capital
transaction
Macro-prudential
measures
Full
Liberalization 13
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15. Cooperation with China and Japan
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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
117
Kor-Chi-Jap’s share of global GDP (2011, %)
Export and Import Values of Kor-Chi-Jap 68 40
121
162
134 86
*2011, US$ billion
184 69
10.5
8.4
1.6
20.5 14
Source : Ministry of Finance, Japan
Ministry of Knowledge and Economy, Korea
Source : IMF WEO on Oct 2012
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16. Payments in Won and RMB for trade between Korea and China
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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
117
BOK
Account of
PBOC
Won
PBOC
Account of
BOK
RMB 69
Won
Won
Chinese
Bank
Korean
Banks
Ask payment to the exporting company
Won
Won
Chinese
Importing company
Korean
Exporting company
Commodities 15
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17. Ⅱ- (4) Way Toward Successful Won Internationalization
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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)
International
organization
Introducing crisis prevention function
One, Simplified and Flexible 16
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18. Regional Financial Cooperation (2)
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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
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19. Issues to be discussed Contents Ⅲ Ⅱ Ⅲ (1) Sequencing issues
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Contents
Issues to be discussed Ⅲ
(1) Sequencing issues
(2) The Benefits and Costs of Currency Internationalization
(3) The Role of Capital Flow Managements
(4) Currency Cooperation at the Regional Level Ⅱ Ⅲ 18
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20. Pre-requisite steps to successful currency internalization
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Ⅲ-(1) Sequencing Issues
Pre-requisite steps to successful currency internalization
Ensuring
macroeconomic
stability
Capacity building
to control liquidity
and credit growth
effectively
Developing or
deepening
domestic
financial markets
Capital
account
liberalization
Are Asian emerging countries ready for currency internationalization?
What is needed to facilitate the process towards currency internationalization? 19
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21. Ⅲ-(2) The Benefits and Costs of Currency Internalization
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Ⅲ-(2) The Benefits and Costs of Currency Internalization
Reducing the need for large foreign
exchange reserves
Eliminating the exchange rate risk
in external transactions
Benefits
Costs
Restricting the pursuit of domestic
monetary policy
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
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22. Emerging Market Countries Capital Flow Management
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Ⅲ-(3) The Role of Capital Flow Management
Advanced Countries
Emerging Market Countries
Capital volatility caused by pull factors
(differences in growth rates and
interest rates etc.)
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
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23. Ⅲ-(4) Currency Cooperation at the Regional Level
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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
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24. HKCMG2010\Korea\MOSF\IR\100305_ROK_Presentation_ver20.ppt
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Thank you !! 23
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