South Korea, in seeking to safeguard the country’s economy from possible financial upheaval has signed a pact to swap currencies worth A$5 billion or US$4.7 billion with Australia. This means that the two countries can use their local currencies for their trade activities that are normally settled using U.S. dollars. The deal also includes a provision for the countries to use the currency swap agreement for non-trade settlements.
Boosting trade
The deal will help the two countries to boost and promote bilateral trade between them. At the same time, it will help them control the swings in currency. The Australian Central Bank Governor Glenn Stevens and Bank of Korea Governor Kim Choong-soo signed the deal in Sydney during the G20 Finance Ministers and Central Bank Governors meeting. This gives them the leeway to buy and buy back their currencies for up to five trillion won. The deal is valid for three years and is renewable upon mutual agreement.
Trade agreement
South Korea, which is the fourth largest economy in Asia, had a bilateral trade agreement with Australia. In 2013 their agreement was worth $30 billion. The country is also ranked as the fourth biggest trade partner of Australia, which exports crude oil, coal and iron ore to South Korea. Australia on the other hand is South Korea’s seventh biggest trade partner.
South Korea’s currency swap deals
South Korea has been entering into currency swap deals to prevent financial “surprises.” On October 2013, the country signed a currency swap deal with the United Arab Emirates for $5.4 billion and with Indonesia for $10 billion.
These are not the only currency swap deals that South Korea had signed. It also has a deal with China worth ₩64 trillion and with Japan for $10 billion. The deals with Japan and China are part of the Chiang Mai Initiative, which is an agreement for multilateral swapping of currencies among the 10 ASEAN member countries plus South Korea, Japan and the People’s Republic of China as well as Hong Kong. The Initiative draws funds from a pool of foreign exchange reserves amounting to US$120 billion. It was launched on March 24, 2010. The pool has doubled its reserves in 2012.
The Chiang Mai Initiative
The initiative came about during the annual meeting of the Asian Development Bank on May 2000 held in Thailand, which was attended by the representatives of the 10 ASEAN member countries plus the three countries – Japan, People’s Republic of China (with Hong Kong) and South Korea. After the region was hit by the Asian financial crisis in 1997, the countries in Southeast Asia have started the initiative to help solve the short-term problems on financial liquidity by the member countries. The initiative also helped ease the work of finance organizations such as the IMF and the ADB in the region and international financial arrangements of the member nations.
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