Foreign Exchange Reserves at Lowest in 4 Years Amid Currency Defense

Bank of Korea's 'End of June Foreign Exchange Reserves'
Foreign Exchange Reserves at Lowest Since June 2020

Last month, South Korea's foreign exchange reserves recorded their lowest level in four years as part of efforts to defend the exchange rate. This was due to the foreign exchange authorities increasing the currency swap transaction limit with the National Pension Service to 50 billion dollars, along with the dollar's strength causing the US dollar equivalent value of other currency foreign assets to decrease.

According to the 'End of June Foreign Exchange Reserves' released by the Bank of Korea on the 3rd, South Korea's foreign exchange reserves at the end of last month stood at 412.21 billion dollars, down 620 million dollars from the previous month. The previous lowest level of foreign exchange reserves was in June 2020 (410.75 billion dollars).

South Korea's foreign exchange reserves had decreased for two consecutive months until February due to the strong US dollar but increased by about 3.513 billion dollars in March due to a rise in foreign currency deposits at financial institutions. Since April, the reserves have been declining for three consecutive months as the foreign exchange authorities took market stabilization measures amid soaring exchange rates.

Kim Young-woong, head of the foreign exchange accounting team at the Bank of Korea, said, "Foreign currency deposits at financial institutions increased due to the quarter-end effect," but added, "Foreign exchange reserves decreased due to the maturity repayment of foreign exchange stabilization bonds, temporary effects from the currency swap with the National Pension Service, and the decrease in the US dollar equivalent value of other currency foreign assets caused by the strong US dollar."

Typically, at the end of a quarter, financial institutions such as banks temporarily increase foreign currency deposits as they raise reserve funds to comply with the Bank for International Settlements (BIS) capital adequacy ratio.

Also, in June, the foreign exchange authorities (Bank of Korea and Ministry of Economy and Finance) increased the currency swap transaction limit with the National Pension Service from the previous 35 billion dollars to 50 billion dollars until the end of this year, which temporarily reduced foreign exchange reserves. Once the swap period expires and the dollars are recovered, the foreign exchange reserves will increase again.

Kim explained, "In June, foreign exchange reserves temporarily decreased due to the time lag between maturity repayments and new issuances of foreign exchange stabilization bonds," but added, "The payment for new issuances in July is expected to act as an increasing factor."

Looking at foreign exchange reserves by asset type, securities such as government bonds and corporate bonds accounted for the largest portion at 363.98 billion dollars (88.3%). Other components included deposits at 24.43 billion dollars (5.9%), Special Drawing Rights (SDR) at the International Monetary Fund (IMF) at 14.65 billion dollars (3.6%), gold at 4.79 billion dollars (1.2%), and IMF positions at 4.36 billion dollars (1.1%).

As of the end of May, South Korea maintained its 9th place globally in terms of the size of foreign exchange reserves. China ranked first with 3.232 trillion dollars, followed by Japan with 1.2316 trillion dollars, Switzerland with 888.1 billion dollars, and India with 651.5 billion dollars.