South Korea will closely monitor the currency market here as external risks such as the eurozone debt crisis can fuel volatility, a government report showed Monday.

   According to the report submitted by the Ministry of Strategy and Finance for the annual parliamentary audit, the government will also keep its policy focus on stabilizing prices in the face of mounting inflationary pressure.

   "We will thoroughly monitor such external risks as the eurozone debt crisis and global economic slowdown that could affect the movement of the currency exchange rates here," the ministry said.

   "At the same time we will take action to stabilize the (currency) market if the exchange rates suffer steep ups and downs and other herd behavior caused by deepening external instability," it added.

   The ministry, however, stressed that it will stick to its stance that exchange rates should reflect economic fundamentals and demand and supply in the market.

   The remarks come as the nation's currency markets suffered turbulent trading in recent weeks due to deepening default woes in Greece and other European countries.

   To cushion any possible external shocks going forward, the ministry said that it will strive to improve the country's overall economic health, while at the same time taking "preemptive" action against potential risk factors, such as rising household debt.

   Regarding the nation's budget plan for next year, the ministry said it will work hard to realize a "sound" fiscal status by streamlining expenditure and focusing on creating jobs and other areas that need an active government role. It also promised to achieve its target of a balanced budget in 2013.

   Touching on the government's overall macroeconomic policy, the ministry said that it will prioritize stabilizing prices "for the time being" as the nation struggles with inflationary pressure.

   "With inflationary pressure remaining high, we will focus on stabilizing prices for the time being. But we will respond flexibly by taking into account real economic and financial market situations," the ministry noted.

   South Korea declared a "war" against inflation earlier this year, but it has been losing the battle in the face of rising food and raw material prices. Consumer prices, a major gauge of inflation, jumped 5.3 percent on-year in August, the fastest pace in three years and up from a 4.7 percent gain in July.

   Meanwhile, Finance Minister Bahk Jae-wan told lawmakers during the audit session that the economy faces a "murky" forecast as major advanced countries go through slowdowns.

   He also noted the government has been doing its utmost this year to "communicate with the market in the face of mounting external uncertainties," but "there is a long way to go" given that such problems as inflation, household debts and unemployment have yet to be resolved.

   Speaking on the eurozone debt crisis, Bahk said it is the "majority opinion" that Greece is "effectively in a state of default." He expressed concern that South Korea could be affected by a Greek default as it is possible that money invested by European banks, in such nations as France and Belgium, could be withdrawn.

   "We are now closely monitoring international financial markets including Europe around the clock and examining contingency plans needed to counter any possible situation," he said.

Source: Yonhap News (Sept. 19, 2011)