Without Touching the Foreign Reserve Principal
Funding Through Returns on Foreign Currency Assets and Overseas Bonds
Significant Portion from Interest on U.S. Treasury Holdings
The 200 billion dollar cash investment in the United States will be carried out using the profits from the management of foreign currency assets as the main source of funds. The plan is to minimize shocks to the domestic foreign exchange market by distributing the investment-up to a maximum of 20 billion dollars per year-using only the earnings generated from the management of foreign reserves, without touching the principal. The cash investment will be made in dollars, within a set annual limit, depending on the progress of the project. Although the total dollar investment is substantial, the government and market observers believe its impact on the exchange rate and the value of the Korean won will be limited, since the investment will not be made through direct market purchases.
According to the foreign exchange authorities on October 30, as of the end of last month, approximately 90% (378.42 billion dollars) of Korea’s total foreign reserves of 422.02 billion dollars consists of marketable securities, including government bonds, government agency bonds, corporate bonds, asset-backed securities, and overseas stocks. The foreign currency earned by Korea is not simply stored in the Bank of Korea’s vaults but is invested in overseas bonds and other assets. Since foreign reserves must be available for use at any time in case of emergency and are directly linked to the country’s creditworthiness, they have been managed with a focus on stability rather than profitability. For this reason, about half (47.3%) of all marketable securities are invested in U.S. Treasury bonds and similar instruments.
The majority of Korea’s foreign asset management profits come from interest and dividend income generated by U.S. Treasury bonds and overseas stocks. Recently, the strong performance of overseas stock markets has led to a marked increase in returns from foreign asset management. The average annual return on marketable securities is estimated to be between 2% and 5%. Based on the current amount invested in marketable securities, this translates to a maximum annual profit of 18.9 billion dollars. If only the assets entrusted to Korea Investment Corporation (227.6 billion dollars) are considered, the annual rate of return is 11.73%, meaning that profits from management alone would far exceed 20 billion dollars under this standard.
The government is also considering raising some of the funds by issuing bonds, given the possibility of profit fluctuations due to insufficient management returns or changes in global financial markets. Kim Yongbeom, Chief Policy Officer at the Presidential Office, stated, "There are considerable returns from interest and dividends, so a significant portion can be utilized. If we issue bonds for part of the funds, they will be in the form of government-guaranteed bonds." He added that policy banks such as Korea Development Bank or Export-Import Bank of Korea would be able to raise sufficient funds in overseas markets, including the United States, Europe, and Asia.
An official from the financial investment industry commented, "The annual investment limit of 20 billion dollars is a way to raise funds stably without directly reducing the principal of foreign reserves. The annual procurement of 20 billion dollars will be operated in a capital call (installment) manner, and some will be raised externally through the issuance of government-guaranteed bonds, which will help reduce the burden on the foreign exchange market." On the day news of the customs negotiation agreement was reported, the won-dollar exchange rate opened at 1,425 won, down 6.7 won from the previous session in the Seoul foreign exchange market.
The currency swap agreement proposed by the Korean government as a safeguard for the foreign exchange market was excluded from this agreement. The government explained that, since it was agreed to pay the investment in long-term installments, a currency swap was no longer necessary. Initially, both the idea of a currency swap led by the U.S. Federal Reserve and the use of the Treasury’s Exchange Stabilization Fund (ESF) were mainly used as negotiation strategies to signal the burden on Korea’s foreign exchange market. Currency swaps have a short maturity of one to three months and carry high interest costs, making them unsuitable for raising investment funds over several years.
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