South Korea’s government plans to tighten monitoring of banks’ liquidity and scale down its bond sales volumes in July as possible reductions in Federal Reserve stimulus roil capital flows from developing countries.
South Korea’s fundamentals from budget to foreign reserves are sound, so speculation on a Fed move is unlikely to spur any drastic capital outflows, Vice Finance Minister Choo Kyung Ho said in Seoul.
“We should watch out for excess caution” after Fed Chairman Ben Bernanke’s comments about an early exit from stimulus, Choo told reporters before a meeting of policy makers. The possibility of such a move “indicates optimism over the U.S. economic recovery in the mid and long terms, which will give a chance to boost our exports. We believe volatility on emerging markets may be short-lived.”
Choo met officials at the Bank of Korea, Financial Services Commission, Financial Supervisory Services and state-run Korea Center for International Finance to discuss dealing with volatile financial markets.
The won fell 2.5 percent to 12,154.15 per dollar in Seoul in the week ended June 21, its biggest decline since the five days ended Sept. 23, 2011, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, surged 258 basis points, or 2.58 percentage points, to 12.98 percent in the week ended June 21.
The government plans to scale down the volume of its long-term treasury bond sales in July to adjust liquidity in the local market in a flexible manner, Choo said.
Foreign buying of Korean bonds outstripped selling by more than 300 billion won ($260 million) on June 20-21 after Bernanke’s remarks, while Korea’s benchmark Kospi equity index fell 3 percent on foreign selling during the same span, Choo said.