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The deal was signed by Bank of Korea Governor Kim Choong-soo and the Reserve Bank of Australia Governor Glenn Stevens yesterday in Sydney, where the two central bank chiefs were attending a Group of 20 meeting.
Under the agreement, the two countries will be able to exchange their local currencies up to 5 trillion won ($4.5 billion), or 5 billion Australian dollars. The deal will run for three years but can be extended if the two countries agree.
“This agreement is designed to promote bilateral trade for the economic development of the two countries,” the BOK said in a joint statement with the Reserve Bank of Australia. “In particular, the agreement will ensure that trade between the two countries can continue to be settled in the local currency even in times of financial stress. The agreement can also be used for other mutually agreed purposes.”
The Ministry of Strategy and Finance said both countries have been trying to ink the currency swap deal after President Park Geun-hye and Australian Prime Minister Tony Abbott met during the East Asia Summit in Brunei last October and discussed ways to strengthen their economical relationship.
Australia is Korea’s seventh-largest trade partner, while Korea is its fourth-largest trading country. Their bilateral trade volume reached $30.3 billion last year, with a trade deficit of $11.2 billion on the Korean side, according to data from Korea International Trade Association.
However, the Finance Ministry said the countries have a complementary trade relationship as Australia is a resource-rich country, having the largest reserves of uranium and iron ore. Among the $20.8 billion worth of products Korea imported from Australia last year, natural resources accounted for more than 80 percent.
The government said that the currency swap agreement is based on the two countries’ local currencies rather than the U.S. dollar because its main purpose is to reinforce their economic ties in normal times.
It also expects more bilateral trade with Australian after the Korea-Australia Free Trade Agreement is signed this year. The two countries already signed an initiation of the FTA on Feb. 10.
The Finance Ministry said that the Australian dollar is the fifth-largest traded foreign currency behind the British pound, according to the Bank for International Settlements (BIS), while it is the No. 6 currency on the International Monetary Fund’s currency composition of official foreign exchange reserves (Cofer).
The Finance Ministry said the currency swap deal is a “very timely” action to ensure financial security after the U.S. Federal Reserve’s tapering of its quantitative easing triggers rising volatility in the global financial market.
The Korean government has recently been pushing currency swap agreements with other countries to reduce its dependence on the greenback for trade settlements and to seek better protection against risks in international credit markets.
In fact, Australia is the fourth country that Korea signed a currency swap deal with in less than five months. It previously signed similar deals with Indonesia, the United Arab Emirates and Malaysia.
With the deal, Korea now has bilateral local currency swap agreements totaling $80.6 billion, of which $56 billion is with China’s central bank, according to BOK data. In addition to the non-dollar currency swaps, Korea is also part of a $29.2 billion multilateral currency swap called the Chiang Mai Initiative.
BY JOO KYUNG-DON [kjoo@joongang.co.kr]
