Four government entities are in charge of foreign exchange activities in South Korea: the Ministry of Finance and Economy (MOFE), the Bank of Korea (BOK), the Financial Supervisory Service (FSS), and the Korea Customs Service (KSS). The ministry sets the overall foreign exchange policy, and the Bank of Korea holds and manages the foreign reserves, while managing all transactions pertaining to foreign trade and capital movements. It also supervises money-changers and foreign-exchange brokers, and provides foreign-exchange banks with foreign currency loans. The FSS supervises financial institutions that are involved in foreign-exchange activities. The KSS has some foreign-exchange regulatory responsibilities towards international trade. Apart from these government regulatory and supervisory institutions, banks involved in foreign exchange have the authority to engage in such financial transactions, including international banking.
South Korea has a free- floating exchange rate (a rate determined by supply and demand). This type of fluctuating exchange rate limits the MOFE's ability to prevent or to minimize the negative impacts of sudden changes of exchange rates. In 1997, for instance, the MOFE temporarily prohibited South Koreans from purchasing foreign currencies for holding purposes.
The rate of exchange of the South Korean won against the U.S. dollar remained more or less stable in the early 1990s. As the economy began to experience problems in the second half of the 1990s, it began to depreciate gradually against the dollar from 771.27 in 1995, to 804.45 in 1996, and to 951.29 in 1997. This relatively small fluctuation did not have a major impact on the pace of economic activities and the purchasing power of the population until the financial crisis of 1997. In early 1998, the exchange rate jumped to 2,000 and gradually fell to average at about 1,401.44. As the economic recovery began, the rate fell to 1,188.82 in 1999 and to 1,130.96 in 2000. Reflecting the depreciation of the won against the
|Exchange rates: South Korea|
|South Korean won (W) per US$1|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
U.S. dollar, the sharp and sudden increase in the exchange rate had a major negative impact on the South Korean economy, which is heavily dependent on large imports of capital goods and energy. The lowering of the exchange rate in 1999 and 2000, which was the result of a gradual economic recovery, contributed to the recovery itself by decreasing the cost of imported goods and fuel.
There have been various restrictions and regulations on foreign-exchange operations since the 1960s. These government-imposed measures were designed to ensure the availability of foreign currencies to South Korean enterprises and to prevent the flight of capital from South Korea. Under foreign pressure, the South Korean government began to liberalize the foreign exchange market in mid-1992. The 1997 IMF-led rescue package required the country to commit itself to liberalizing all aspects of the foreign-exchange system by the end of 2001. In reality, the system has yet to become fully liberalized as the South Korean government has introduced many new direct and indirect regulations in various forms, including restrictions on certain transactions, tax rules, and monitoring regulations, to ensure its control over the financial system.
The Korea Stock Exchange (KSE) in Seoul is the only stock market in South Korea for trading bonds and stocks. It was opened in 1992 to direct portfolio investment from abroad. The reform of the South Korean economy since 1997 has removed restrictions on foreign ownership of South Korean enterprises, and the KSE is now authorized to sell their stocks to foreign buyers without any limit.