South Korea's foreign reserves rise $370 million despite exchange-rate stabilization measures

By Kim Byeo-ri, The Herald Business

South Korea's foreign exchange reserves grew by $370 million in June despite government efforts to stabilize the won-dollar exchange rate, as a rise in dollar deposits at financial institutions led to a corresponding increase in foreign-currency funds held at the Bank of Korea.

The country's foreign reserves stood at $427.36 billion at the end of June, up from $426.99 billion a month earlier, the Bank of Korea said Thursday.

The central bank said the modest increase came despite market-stabilization measures including a foreign exchange swap arrangement with the National Pension Service, which allows the fund to obtain dollars directly from the Bank of Korea rather than through the open market, thereby exerting downward pressure on the exchange rate. The increase was driven mainly by a rise in foreign-currency deposits placed by financial institutions at the central bank.

The monthly average won-dollar exchange rate in June — based on weekly closing prices — came to 1,528 won, the highest since the 1997-98 financial crisis. The rate climbed about 2.5 percent from the previous month's 1,491.3 won, as continued net selling of domestic shares by foreign investors — extending a trend from May — combined with a stronger dollar fueled by concerns over US inflation.

Foreign reserves have fluctuated in the low-to-mid $400 billion range this year. They rose in February on the back of new issuance of foreign exchange stabilization bonds, then fell in March as authorities intervened to defend against a sharp won depreciation. Reserves rebounded sharply in April on higher investment returns before declining again in May, and have now turned upward once more.

By asset class, deposits — the most liquid component — rose $920 million from the previous month to $22.27 billion, largely reflecting the increase in foreign-currency funds placed by financial institutions. A Bank of Korea official said banks had been depositing more into their foreign-currency reserve accounts when they had surplus foreign funds, adding that the trend was driven by residents increasing their dollar holdings in anticipation of further won weakness. Dollar deposit balances reached $95.56 billion at the end of June, up $2.24 billion from $93.32 billion a month earlier, according to the Bank of Korea.

A temporary interest payment scheme on excess foreign-currency reserves — introduced by the authorities as part of their exchange-rate stabilization toolkit — also appears to have contributed to the rise in deposits. Under the measure, the Bank of Korea pays temporary interest on excess foreign-currency reserve deposits that financial institutions hold at the central bank.

The scheme allows financial institutions to earn stable, low-risk interest income on foreign-currency funds domestically, rather than deploying them abroad. It also creates an incentive for non-financial institutions and individuals to repatriate foreign-currency deposits held overseas. The Bank of Korea approved the measure at an emergency Monetary Policy Committee meeting in December, setting an initial deadline of June, but recently extended it by six months.

Securities — including US Treasury bonds, government agency bonds and corporate bonds — fell $330 million to $380.34 billion over the same period. IMF special drawing rights declined $140 million to $15.64 billion, while the IMF reserve position fell $90 million to $4.31 billion.

Based on end-of-May figures of $427 billion, South Korea ranked 13th globally in foreign reserve holdings, slipping one place from the previous month after Singapore's reserves reached $430.1 billion. South Korea has been outside the top 10 since February, when it was overtaken by Italy and France.