KDI Economic Outlook 2022-1st Half Impact of External Uncertainty on Exchange Rate and Capital Flow May 12, 2022
May 12, 2022
■ Rising external uncertainty increases the capital outflows and depreciates exchange rates, but the magnitude has decreased after 2014.
- We have shown that, after Korea transitioned to a net creditor position in 2014, the extent of the exchange rate depreciation and capital outflows decreased.
- This change can be attributed to positive feedback from foreign investors on Korea’s business competitiveness and macro-policy management.
- The total Korean government bonds held by other countries as foreign exchange reserves are approximately $81 billion as of the end-2020. The magnitude is higher than other currencies except for the US dollar and the euro.
■ In the short term, we suggest that the financial market be closely monitored and prepare for sudden market disruption.
- Ongoing global uncertainty expansion could possibly be very devastating; with sudden outlfows being realized, proactive policy measures, including foreign exchange prudential regulations, should be called for.
■ In the mid-to-long term, consistent efforts should be made for stable inflation, and the overall level of the public debt needs to be managed. Also, improvement in access to the forex market is highly recommended.
- Policies to rein in recent high inflation and burgeoning sovereign debt are at the core of macroeconomic stability and maintaining external debt soundness.
- For business competitiveness, it is necessary to upgrade Korea’s macroeconomic fundamentals, the basis of the won currency, by enhancing economic dynamics through regulatory system reforms and infrastructure investment.
- At the same time, mid-to-long-term efforts should continue to strengthen the status of the won currency.
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