UPDATE 1-S.Korea may tap FX reserves in next step to help distressed firms

(Adds details, comments)

By Cynthia Kim

SEOUL, March 20 (Reuters) – South Korea’s finance minister said on Friday that helping distressed companies secure more dollars using foreign exchange reserves or an FX stabilisation fund could be the government’s next step to address funding stress from the coronavirus pandemic.

Speaking to foreign media, Hong Nam-ki said the government has various measures ready to stabilise currency markets outside the new currency swap being signed between the Bank of Korea and the U.S. Federal Reserve.

“It’s more important to prevent dollar shortages than gauging whether the absolute amount of the FX reserves are at an appropriate level,” Hong told a small group of foreign media at a news conference.

Asia’s fourth-largest economy has the world’s ninth biggest foreign exchange reserves at $409.17 billion as of end-January.

“We have tools to help companies to channel dollars to companies, using FX reserves” and other state-run funds, he said.

Hong’s comments come after the ministry announced targeted remedies to beef up dollar supply in local derivative markets on Wednesday, following a rush by brokerages to secure dollars to ensure future cash flow that led to a scramble for dollar financing.

The BOK is one of nine central banks the U.S. Federal Reserve will sign new dollar swap lines with, providing access to dollars as pandemic fears drive up global demand for the world’s reserve currency.

Even so, jitters in financial markets may continue and lead to a contraction in South Korea’s economy in the first quarter, Hong said.

“Given the impact (from the coronavirus) on domestic consumption, investment and exports, we cannot rule out such a scenario,” Hong said when asked if the economy could contract.

The deepening economic impact from the respiratory disease has wiped out almost a third of the key KOSPI share index this month, pushing up the cost of raising U.S. dollars to the worst since the 2008/09 global financial crisis.

Many South Koreans have cut back on their daily activities to avoid spreading the virus, in a massive blow to restaurants, airlines, hotels and the entertainment industry.

On plans to stabilise local bond markets, Hong said he hopes to use more than 5 trillion won for companies facing a liquidity crunch, which is likely to be deployed on an as-needed basis.

South Korea is battling the region’s biggest outbreak outside China with more than 8,600 infections, although the daily tally has begun to see a downward trend. It has started imposing tighter border checks following a recent rise in infected travellers. (Reporting by Cynthia Kim; Editing by Jacqueline Wong)

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