NAME OF THE STUDENT
NAME OF THE COURSE
NAME OF THE TUTOR
The move by South Korea to oversee the rules in reference to transactions on currency is a bold one for strengthening their exports value in the global market and within the country. The article evaluates the rates of foreign currency exchange in respect to the South Korean Won against the US dollar, since the latter has probed dominance over other currencies. Further the paper evaluates the effect of uncontrolled foreign currency flow towards the economy with reference to the country’s export and investors. The countries financial institutions are the aspect of government scrutiny to regulate the rate of foreign currency to reduce occurrence risks brought by unregulated currency exchange. The Korean banks have resulted to initiating foreign borrowing with short period of clearance; hence the short term clearance is in consideration of interest rates leading to attainment of more foreign currency floods. By the end of next month; May 2011, examination of major four banks in South Korea will be completed to analyze and restrain the root of the problem before it exceeds to Brazil’s 2009 status in deficits. If the situation proves complex, investigation of other banks will commence in the following month.
According to (In-Soo Nam, n.p), a trace of offshore liability is evident hence the government immediate action to restrain that economic crack to a more serious gulley, as a previous crisis had alienated the country from foreign regulated inflows, hence low turn out of investors from foreign countries. This move will limit the rate of forward exchange cover that has led to the incurrence of deficits in the country. By May 2011, South Korean banks are set to experience government strict regulations and monitoring. On the contrary, the anticipation from the market presents different views with ratio of 5:1 variation, with foreign capitals preference for reduction exceeding the domestic one.
THEORY AND ANALYSIS
Forex exchange is one of the most uncertain markets globally with little or major effects, changing it altogether. However, with economic knowledge it proves easy income generating opportunity in the comfort of one’s home. It involves little effort, with monitoring market dynamism and the effects they incur on factors like, taxes, gross domestic product and many more. In reference to this, (In-Soo Nam, n.p) indicates the South Korean strategy to regulate this sector is bold, for implications are evident and pre assumed once control lacks. Forex exchange activities are conducted by banks especially the major ones within a given country, hence with little regulation from the government or policies that will foster abiding rules fails the whole economy value since the assets from that country lose value and over dominance of the foreign capitals. Market expectations may differ from those of the regulatory bodies but the mandate is to protect the domestic currency over the foreign to maintain the value in the global exchange. Most of the rules that are applied with consideration of the economic damage realized are in respect to regulating rate of exchange in domestic financial institutions, hence overall acquisition of offshore money by the Koreans, and exercising restriction on rates of exchange. Further, currency control reduces deficits acquired from domestic financial institutions borrowing money from foreign states, with uncertainty of Forex market dynamism, hence more debts to these institutions. In addition, this trend may prove successful and propel other financial institutions to follow the same and in the same uncontrollable Forex market leading to massive national economic crisis.
Financial institutions within a given state facilitate the exchange of foreign currency, with the domestic one. Involvement in this market include the financial institutions, the government, major investors within the country and from foreign countries, market observers and authorizing bodies who evaluate the market for loop holes that may cripple domestic currency and the economy, though risk taking is not withdrawn. South Korea’s regulation on foreign exchange is a move mostly taken by most emerging economies to control the payment balance over the country’s financial liabilities and assets. Therefore, this move probes to develop the assets within the South Korea market so as to increase the competitive advantage of their exports within the global foreign exchange market. In this regard, (In-Soo Nam, n.p) notes that since the South Korean Won performance in the Forex market was moving high with respect to the dollar, the authorities intercepted this trend to avoid the country’s economy from experiencing a flat economic gain due to the value loss of the exports in the market. In mid 2010, the government introduced these rules but due to a loop hole in financial institutions deficits this year, strict rules have been reinforced (In -Soo Nam, n.p).
The United States is one of the developed countries, who engage in exchange that is contract bided, with specific rates offered by the country they trade with, with guarantee of risk evasion. On the contrary, South Korea sees this as diminishing the domestic currency, with ( In Soo Nam, n.p) portraying what the authorities deem as contracts that are not delivering, with short duration borrowing activities evident in from financial institutions perspective. The strategy to reduce the capital margins in the forward contracts between the local financial institutions and the foreign ones on a ration of 5: 1, foreign to local respectively as the authorities propose, contradicts with the market observers.
According to representation on figure 1.1, the South Korean Won trades high against the dollar with figures rising every day from the local Forex market analysis and in New York. Without the intervention, Won may continue to rise against the dollar, creating imbalance in the export values. Therefore the foreign investors will take over the market, flooding is with offshore currencies , which will affect the country’s currency and its purchasing power inclined to foreign currencies, thus foreign liabilities.
According to, (In-Soo Nam, n.p) the external liability within the country’s financial sector, has fueled the country to tighten regulations if the Forex exchange, hence the examination of financial institutions in the country. The exercise will derive adjustments in the currency exchange directed to these institutions as of May 2011, to curb the possibility of a currency and country’s economic puncture. Though regulations were introduced in mid 2010; a trace of deficit has sped the moves. South Korea has experience on the consequences of debts ascertained by the foreign; investors will lead to automatic withdrawal from the country investment sector, leaving no choice than to seek funds from international financing institutions such as the World Bank and many others. More so, the exports from, this countries are overlooked in the Forex market especially the developed countries, since they evade uncertainty in the exchange. Mostly this is in respect to the taxes that a country may impose on the foreign countries to offset their liabilities.
PERSONAL OPINION AND CONCLUSION
The more in inflow of other currencies without control of the financial institutions enhancing the exchange, the more the value of the domestic currency falls. Governments intervention on the local Forex market in relations to the monetary flow in the country form the foreign countries, could affect the rate of exchange with disastrous effect on the gross domestic product and country’s economy. If the country records deficits in its estimate in turnover and expenditure, the international market reacts to the situation alienating the country from investments on project, since nobody would want to risk his/ her assets in uncertain country economic situation. If expenditure surpasses the turnover, the economy is in trouble, for it will fuel more borrowing to satisfy the spending power of the nation, through financial institutions and the government finance ministry.
To deal with this situation, South Korea intervention, will not only save the exports but the deficits that are probable from being realized. A smart move is to authorize a major financial institution to oversee the regulation over other institutions with abiding rules, hence monitor the exchange future and spot.
In conclusion, the effect that this move will attain is in respect to trade balance between the country and offshore states hence general positive implications incurred in gross domestic product, regulated and certain exchange rates and taxes leading to overall attraction of investors in the country, and the South Korean Won value in the market advances.
In-Soo Nam, Kanga Kong. “South Korea considers tightening Forex rules further.” Wall Street Journal (Online) 26 April 2011: 1
Figure 1.1: Representation of South Korean Won against Dollar, with effect of rise on the country’s exports before the government’s intervention on the Forex market.