Currency volatility to widen due to gov't plan to offset tax shortfall with FX stabilization funds

Deputy Prime Minister and Finance Minister Choi Sang-mok, left, attends an audit with Bank of Korea Gov. Rhee Chang-yong at the National Assembly in Yeouido, Seoul. Yonhap By Lee Kyung-min Korean currency, which recently experienced a sharp depreciation against the U.

S. dollar, is expected to fluctuate wildly, unsettled by the government’s plan to draw up to 6 trillion won ($4.5 billion) from the foreign exchange (FX) stabilization fund to alleviate a tax shortfall of 30 trillion won this year, market watchers said Tuesday.



The finance ministry maintains fiscal maneuvering will have greater room, aided by reduced dollar in the fund portfolio in turn boosting won asset valuations. This is an easier and less risky option, since the alternative — debt financing or austerity measures — would come at the expense of fiscal soundness, the country’s creditworthiness and the already stagnant economy. Critics say, however, the purpose of the fund will be undermined, since the discretionary adjustment should be reserved as a last resort, especially for scenarios of extreme currency volatility amid evolving global geopolitical tensions.

Read More Korean won's rapid decline against dollar likely to influence future rate cuts, says BOK head BOK loses young employees due to noncompetitive salary BOK hit by 97 cyberattacks last year, reports no cases linked to North Monetary easing isn't 'silver bullet’: BOK head “The government seeks to maximize the use of untapped reserves until next year’s tax revenues are sourced,” said Lee In-ho, a former economics professor of Seoul National University. The decision, albeit understandable, raises concerns, in his view, because it will compromise currency fluctuation buffers. “The FX stabilization fund is among many reserves to be sourced for impending government fiscal needs.

The judgment is that using currently available sources is better before exhausting all the other options to issue debt. It is all in all a stop-gap measure nonetheless.” The assessment coincides with the Korean won’s loss against the dollar over the past month.

The won came to an intraday and three-month low of 1,391.5 won against the dollar, Monday, far weaker than the 1,310 won a month prior. Most at play was the stronger dollar, underpinned by expectations of former U.

S. President Donald Trump’s possible victory in the November election. Also in the mix were Korea’s weaker-than-expected 0.

1 percent quarter-on-quarter GDP growth in the third quarter, wider war concerns in the Middle East and a stronger-than-expected economy in the U.S. pushing back the timing of further easing.

The finance ministry said the concerns are overblown. “The country’s FX reserve ranks ninth globally, with over $400 billion,” said Kim Hee-jae, director of foreign currency funds at the ministry. The FX funds to be sourced for the tax shortfall are in Korean won, irrelevant to the sale of dollars in the event of the won losing value against the global reserve currency, he said.

“The dollar reserve is more than ample, to say the least,” he said. “An increase in FX fund use will not spell negative consequences for the dollar reserve.” Deputy Prime Minister and Finance Minister Choi Sang-mok said Monday during a National Assembly audit that the government will draw up to 16 trillion won from reserves and special accounts and withhold 6.

5 trillion won in funds previously earmarked for municipalities. Korea registered a tax revenue shortfall of 56.4 trillion won last year.

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