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December, 2011
Shin, Je-Yoon Vice Minister
The Future of The Future of the International Monetary the International Monetary SystemSystem
Currency Internationalization,Currency Internationalization, and International Monetary Reformand International Monetary Reform- Korea’s Experience and Future Issues -- Korea’s Experience and Future Issues -
SUNGSOO EUNDirector General International Financial Policy BureauMinistry of Strategy and FinanceRepublic of Korea
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Contents
BackgroundBackground
Internationalization of Korean Internationalization of Korean WonWon
Issues to be discussedIssues to be discussed
Ⅰ
Ⅱ
Ⅲ
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Contents
BackgroundBackgroundⅠ
Ⅱ
Ⅲ
4
Ⅰ- (1) Current International Monetary SystemCurrent International Monetary System
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
Dollar domination in FX transactionsDollar domination in FX transactionsDollar domination in FX transactionsDollar domination in FX transactionsDevelopment of Financial SectorDevelopment of Financial SectorDevelopment of Financial SectorDevelopment of Financial Sector
What is the problems?
Source : BIS
USD trillion USD trillion
Source : The Banker, World Bank, BIS
5
Ⅰ- (2) Emerging Markets ; Original Sin?Emerging Markets ; Original Sin?
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)Capital inflows/outflows (USD, billion)Capital inflows/outflows (USD, billion)Capital inflows/outflows (USD, billion) FX rate (won/dollar) movementsFX rate (won/dollar) movementsFX rate (won/dollar) movementsFX rate (won/dollar) movements
Impacts on EMs – Korea’s experience
Asian crisis Global financial crisis
‘95.1 ‘97.11
’98.4 ’08.9 ’09.1 ’12.9
78.1
221.9
116.4
-21.4 -
69.5
Financial
Crisis5 months 4 months
6
Ⅰ- (3) Policy Actions by Korean GovernmentPolicy Actions by Korean Government
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
Measures to deal with volatile capital flows
FX derivatives position
Macro-prudentialstability levy
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Ⅰ- (4) Needs of Currency InternationalizationNeeds of Currency Internationalization
Deal with volatile capital flowsExcessive Capital Flows
Single currency for the multi-polar economies ?High Dependence on USD
Problems of current IMSProblems of current IMSProblems of current IMSProblems of current IMS Policy ResponsePolicy ResponsePolicy ResponsePolicy Response
Currency internationalization efforts by emerging economies
is needed for more resilient and stable
international monetary system.
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Contents
Internationalization of Korean Internationalization of Korean WonWon
Ⅱ
Ⅲ
Ⅱ
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Ⅱ- (1) Current Landscape of Korean WonCurrent Landscape of Korean Won
No hurdle in basic transaction of won and won-denominated current transaction
Regulations concerning capital account transactions in won to some extent
Korea’s currency internationalization efforts so far
Contracts of won-denominated current transactions and capital transactions were liberalized
1988~1992
Payment and settlement of current account transactions in won were liberalized
1996
Deposits were liberalized via ‘free won account’
1999~2001
Purchase of won-denominated securities by non-residentswas liberalized
2001
Borrowing by non-residents was allowed up to KRW 30 billion
2001~2007
unitof
Account
Exchange of won
contracts of current transactions
contracts of capital transactions
paymentand
settlement
current transactions
capital transactions* off-shore settlement btn non-residents
storeof
value
deposits
Borrowings
Securities purchase and issuance
free
reported
* borrowing over KRW 30 billion
* securities issuance abroad
prohibited
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Ⅱ- (1) Current Landscape of Korean Won Current Landscape of Korean Won
Currency use in international trade of KoreaCurrency use in international trade of KoreaCurrency use in international trade of KoreaCurrency use in international trade of Korea
<Import>
<Export>
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
International use of the Won
*2010, percentage of total trade
Purchase of KTBs by foreign Central BanksPurchase of KTBs by foreign Central BanksPurchase of KTBs by foreign Central BanksPurchase of KTBs by foreign Central Banks
12243128
7477
15762
28194
35470
12.10
*2008.1-2012.10, KRW billion
Source : Korea Customs Service
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Ⅱ- (1) Current Landscape of Korean WonCurrent Landscape of Korean Won
International bond issuance in EM currenciesInternational bond issuance in EM currenciesInternational bond issuance in EM currenciesInternational bond issuance in EM 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
Comparison with other emerging market currencies
*percentage of Total EM issuance
EM currencies: OTC FX derivatives turnoverEM currencies: OTC FX derivatives turnoverEM currencies: OTC FX derivatives turnoverEM currencies: OTC FX derivatives turnover
*share percentage out of 200 percent
Source : BIS Quarterly Review March 2011 Source : BIS Quarterly Review March 2011
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Ⅱ- (2) Key Challenges for Internationalization of the WonKey Challenges for Internationalization of the Won
Demand side factors → Economic size, Network effects, Invoicing practices
Supply side factors → Domestic financial market depth, Financial openness, Policy support
Potentials for internationalizing Won
“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.”
“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
Economic size : Economic size : Share of World GDP Share of World GDP (2011, %)(2011, %)Economic size : Economic size : Share of World GDP Share of World GDP (2011, %)(2011, %)
Source : IMF WEO on Oct 2012
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Ⅱ- (2) Key Challenges for Internationalization of the WonKey Challenges for Internationalization of the Won
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
Risks to monetary and financial stability
Financial openness
Exchange ratestability
Monetaryindependence
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Ⅱ- (3) Way Toward Successful Won InternationalizationWay Toward Successful Won Internationalization
Push forward won internationalization → But balanced approach is needed to ensure stability
Trade first, capital transaction second
Balanced approach
Trade Expanding the use of won
1st step
Full Liberalization
2nd step
Capitaltransaction
Macro-prudentialmeasures
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Ⅱ- (3) Way Toward Successful Won InternationalizationWay Toward Successful Won Internationalization
Korea’s position between two huge economies ; “double edged sword”
Cooperation with China and Japan
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7 69
Challenge for expanding regional acceptance of Won
Chance for enhancingGlobal use of Won
68
40
12
1
162
134 86
*2011, US$ billion
184
Export and Import Values of Kor-Chi-JapExport and Import Values of Kor-Chi-JapExport and Import Values of Kor-Chi-JapExport and Import Values of Kor-Chi-JapKor-Chi-Jap’s share of global GDPKor-Chi-Jap’s share of global GDP (2011, %) (2011, %)Kor-Chi-Jap’s share of global GDPKor-Chi-Jap’s share of global GDP (2011, %) (2011, %)
10.58.4
1.6
20.5
Source : Ministry of Finance, Japan Ministry of Knowledge and Economy, KoreaSource : IMF WEO on Oct 2012
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Ⅱ- (3) Way Toward Successful Won InternationalizationWay Toward Successful Won Internationalization
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
Payments in Won and RMB for trade between Korea and China
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7 69
ChineseBank
Chinese Importing company
Won
Won
PBOCAccount
ofBOK
RMBBOK
Account of
PBOC Won
KoreanBanksAsk payment to the exporting company
Korean Exporting company
Won
Commodities
Won
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Ⅱ- (4) Way Toward Successful Won InternationalizationWay Toward Successful Won Internationalization
Chiang Mai Initiatives Multilateralization → firewall for Asian countries to respond to regional crisis
Regional Financial Cooperation (1)
Agreements in 2012Agreements in 2012Agreements in 2012Agreements in 2012 AMROAMROAMROAMRO
International organization
From 120 bn US$ to 240 bn US$
Doubling the total size
From 20% to 30% in 2012, and review in 2014
Increasing the IMF-delinked portion
From 90 days to 1 yr(linked), to 6 mths(de-linked)
Lengthening the maturity
One, Simplified and Flexible
Introducing crisis prevention function
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Ⅱ- (5) Way Toward Successful Won InternationalizationWay Toward Successful Won Internationalization
Asian Bond Market Initiative → develop local currency denominated bond markets → recycle regional savings into regional investments
Regional Financial Cooperation (2)
New roadmap+ in 2012New roadmap+ in 2012New roadmap+ in 2012New roadmap+ in 2012
To produce tangible outcomes, current and critical ongoing issues need to be further developed
Direction 1
To strengthen the momentum for the ABMI discussion, important but undiscussed issues related to bond markets should be added
Direction 2
To meet and accommodate the changing global financial needs, including mitigation of volatility in the capital flow, relevant issues need to be addressed
Direction 3
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Contents
Issues to be discussedIssues to be discussed
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Ⅲ
Ⅲ
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Ⅲ-(1) Sequencing IssuesSequencing Issues
Ensuring macroeconomic stability
Are Asian emerging countries ready for currency internationalization?Are Asian emerging countries ready for currency internationalization?
What is needed to facilitate the process towards currency internationalization?What is needed to facilitate the process towards currency internationalization?
Capacity building to control liquidity
and credit growtheffectively
Developing ordeepeningdomesticfinancial markets
Capitalaccount liberalization
Pre-requisite steps to successful currency internalization
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Ⅲ-(2) The Benefits and Costs of Currency Internalization 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
IsIs it good for emerging market countries to push forward their currency internationalization?it good for emerging market countries to push forward their currency internationalization?
How can we maximize the benefits and minimize the costs?How can we maximize the benefits and minimize the costs?
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Ⅲ-(3) The Role of Capital Flow ManagementThe Role of Capital Flow Management
Is CFM helpful for Emerging Markets’ currency internationalization and stable IMS?Is CFM helpful for Emerging Markets’ currency internationalization and stable IMS?
Is it possible to develop a global rule to manage capital flows? Is it possible to develop a global rule to manage capital flows?
Advanced Countries Emerging Market Countries
Capital Flow Management(CFM) Capital volatility caused by pull factors
(differences in growth rates and interest rates etc.)
Prudent macro-economic policy first, CFM as the last resort
CFM complementing macro-economic policies (No sequence in both)
Capital volatility cased by push factors (spillovers of advanced countries’ expansionary monetary policies)
Overall and mandatory capital liberalization
Sequential capital liberalization (Reducing negative impacts of capital liberalization is first)
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Ⅲ-(4) Currency Cooperation at the Regional LevelCurrency Cooperation at the Regional Level
Use of local currency for local trade settlement
Short-term Long-term
Asian common currency?(Lessons from the Eurozone crisis)
How can we establish effective local currency trade settlement system in Asia?How can we establish effective local currency trade settlement system in Asia?
Is it desirable or realistic for Asia to have a single currency?Is it desirable or realistic for Asia to have a single currency?
Asian
Monetary
Unit
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Thank you !!Thank you !!
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