South Korea to Ease FX Borrowing in Fresh Flip-Flop

South Korea plans to allow state firms to borrow more abroad, the latest in a series of policy flip-flops in recent months that analysts say could undermine already weakening confidence among investors toward the country.

Korean Won.jpg

A finance ministry official said the government was drawing up measures to spur dollar inflow, including allowing state firms to borrow more abroad, to help offset the mounting pressure on the won mainly from increasing costs of importing oil.

Analysts said the move and the recent turnabout in the country's foreign exchange policy pointed to a degree of naivete on the part of the young government which has been managing Asia's fourth-largest economy for only four months.

"I feel like I've been through four years in the past four months," said Kim Jae-eun, an economist at Hana Daetoo Securities. "They seem to feel obliged to do something on everything even when they can just let things go their own way."

A day after the finance ministry and the central bank said they were willing to sell part of the nearly $260 billion foreign currency reserves to prop up the won, dealers reported the authorities selling an estimated $2 billion on Tuesday.

The aggressive dollar sales marked a stark departure from the government's policy until as recently as March of keeping the won down so that exporters can sell their products easily or can earn more from selling their goods abroad.

The turnabout came after the government, launched only in late February, realized rising inflation led by commodities prices and aggravated by the cheaper won was a more urgent priority than boosting exports.

The won has risen 2.5 percent since the finance ministry and the central bank declared the intention to step up dollar-selling intervention on Monday, after its 9.7 percent drop over the four months since the government was launched.

The finance ministry official, who declined to be named, said the eased control on state firms' overseas borrowing would help bring about an additional $4 billion into the local currency market if the companies convert the money into won.

But analysts say the frequent shifting in macro-economic policy could undermine confidence among global investors toward the country and the country's financial markets at a time when investors are already leaving emerging markets.

"I suspect that the reason they came up with this idea of having a kind of intervention in the market is (because) at least the government and the Bank of Korea can say that 'we are trying our best'," Takara Ogawa, a credit ratings director at Standard & Poor's, told Reuters in an interview on Tuesday.

"It's impossible to resist the market force for a long period of time, because the size of the international money either for speculation or investment is much much bigger than the foreign currency reserves can withstand," he said.

South Korea already made a draw of some $10 billion on its foreign reserves until last week to defend the falling won out of fear the weaker won would aggravate local consumer inflation, which in June hit a near 10-year high of 5.5 percent.