Foreign Exchange Reserves Plunge by $19.7 Billion Due to 'Exchange Rate Defense'... Bank of Korea Says "Still Sufficient"

Foreign Exchange Reserves Plunge by $19.7 Billion in One Month
Largest Decline Since 2008 Financial Crisis
Forex Authorities Sell Dollars as Exchange Rate Soars
BOK: "No Doubt Reserves Are Sufficient"

The image of US dollars placed at the Counterfeit Response Center of Hana Bank Headquarters in Euljiro, Jung-gu, Seoul [Image source=Yonhap News]

South Korea's foreign exchange reserves have decreased by approximately $19.7 billion in just one month. This marks the largest decline in 13 years and 11 months since October 2008 during the financial crisis. The sharp rise in the won-dollar exchange rate recently led the foreign exchange authorities to increase dollar sales to defend the exchange rate. Although concerns about an economic crisis have emerged due to the significant drop in foreign exchange reserves, the Bank of Korea explained that the reserves are "still at a sufficient level."

According to the 'End of September Foreign Exchange Reserves' statistics released by the Bank of Korea on the 6th, South Korea's foreign exchange reserves stood at $416.77 billion, down $19.66 billion from the end of the previous month. This is the largest decrease since about $27.42 billion was reduced in October 2008. The foreign exchange reserves had decreased for four consecutive months from March, falling to $438.28 billion, then slightly increased in July before turning downward again last month.

The Bank of Korea explained the reasons for the decrease in foreign exchange reserves this month as "measures to ease volatility in the foreign exchange market, a decrease in the dollar conversion amount of foreign currency assets in other currencies, and a reduction in foreign currency deposits of financial institutions." When exchange rate volatility increases, the foreign exchange authorities sell dollars they hold to defend the value of the won. Recently, due to the U.S.'s aggressive tightening, the dollar's value rose significantly, pushing the won-dollar exchange rate up to 1,440 won, which appears to have increased market intervention by the foreign exchange authorities.

South Korea's foreign exchange reserves are composed of securities at $379.41 billion (91.0%), deposits at $14.19 billion (3.4%), International Monetary Fund (IMF) Special Drawing Rights (SDR) at $14.15 billion (3.4%), gold at $4.79 billion (1.2%), and IMF positions at $4.23 billion (1.0%).

Despite the significant decrease in foreign exchange reserves, as of the end of August, South Korea's foreign exchange reserves ranked 8th in the world, actually rising one position.

China had the largest reserves at $3.0549 trillion despite a $49.2 billion decrease in one month, followed by Japan at $1.2921 trillion. Next were Switzerland ($949.1 billion), Russia ($565.7 billion), India ($560.4 billion), Taiwan ($545.5 billion), and Saudi Arabia ($456.6 billion). Hong Kong dropped to 9th place after its foreign exchange reserves decreased by $10 billion in one month.

[Image source=Yonhap News]

The Bank of Korea dismissed the possibility of a foreign exchange crisis, stating that the reserves are still at a sufficient level despite the significant decrease. Oh Geum-hwa, Director of the International Department at the Bank of Korea, said, "Recently, due to expectations of exchange rate increases, importers tended to purchase foreign exchange earlier, while exporters delayed selling dollars. The intervention was aimed at easing this concentration, and I believe it was meaningful."

Regarding the size of the foreign exchange reserves, Director Oh emphasized, "There is no doubt that it is sufficient," adding, "If you think of foreign exchange reserves as a supplementary tool to enable the market to function normally in response to short-term external shocks, the current reserves are sufficient."

He also explained, "There are concerns that a foreign exchange crisis similar to 2008 might recur, but the situation now is different from then," and added, "The international credit rating agency Fitch evaluated at the end of last month that South Korea's foreign exchange reserves remain sound compared to countries with the same credit rating."