[Financial Microscope] Any Difficulties in Securing $20 Billion Annually for U.S. Investments?

Funding Sourced from Investment Income of Foreign Currency Assets Managed by Bank of Korea and KIC
Shortfall to Be Covered by Issuing Dollar-Denominated Bonds
$20 Billion in Cash Needed in the First Year
Subsequent Funding May Be Partially Co

At the end of last month, a total of 350 billion dollars in investments to the United States was decided as a result of the Korea-U.S. tariff negotiations. Of this amount, 200 billion dollars will be directly invested in the United States, with an annual limit of 20 billion dollars. The key question is whether it will be possible to stably secure 20 billion dollars in cash each year. The government and the Bank of Korea explain that a significant portion can be covered by interest and dividend income earned from managing foreign currency assets. However, opposition parties, including the People Power Party, have raised concerns that, given investment returns and market volatility, stable funding may not be easy to achieve.

"No Use of Foreign Exchange Reserves"... Covered by Investment Income and Dollar-Denominated Bond Issuance

The government is considering two main methods for funding the cash required for U.S. investments: ▲investment income from foreign currency assets (including the Foreign Exchange Stabilization Fund) and ▲issuance of dollar-denominated bonds. The plan is to prioritize the use of interest and dividend income generated from the management of foreign exchange reserves and the Foreign Exchange Stabilization Fund, and to issue dollar-denominated bonds with a government guarantee for any shortfall. The government emphasizes that foreign exchange reserves (428.82 billion dollars as of the end of October) will not be used in this process.

The majority of the funding comes from the investment income generated by foreign currency assets and the Foreign Exchange Stabilization Fund, which are currently managed separately by the Bank of Korea and the Korea Investment Corporation (KIC). The Bank of Korea's Foreign Exchange Reserve Management Department directly manages foreign currency assets, with some assets entrusted to KIC. For the Foreign Exchange Stabilization Fund, issued by the Ministry of Economy and Finance to stabilize the foreign exchange market, some funds are deposited with the Bank of Korea, while others are entrusted to KIC for management. Among these, the investment income generated by KIC, which is entrusted by the Ministry of Economy and Finance and the Bank of Korea, is known to account for the largest share.

Last year, the Bank of Korea earned 12.8 trillion won from managing foreign currency assets. This figure includes interest from securities, interest from deposits, and gains and losses from the sale of securities. It also includes returns from assets entrusted to external institutions such as KIC. When converted at last year's budget exchange rate (1,380 won per dollar), this amounts to approximately 9.27 billion dollars. This falls far short of the agreed annual investment cap of 20 billion dollars, leading some to anticipate difficulties in raising 20 billion dollars each year.

This figure does not include the investment income from foreign currency assets entrusted to the Bank of Korea and KIC by the Ministry of Economy and Finance. In particular, KIC, unlike the Bank of Korea's Foreign Exchange Reserve Management Department, focuses on profitability and therefore achieves higher returns. According to data received by Assemblyman Cha Kyugeun of the Innovation of the Homeland Party, a member of the National Assembly's Planning and Finance Committee, KIC posted a high return of 11.7% from the beginning of this year to the end of September. The amount of foreign currency assets managed by KIC increased by 21.1 billion dollars, from 206.5 billion dollars at the end of last year to 227.6 billion dollars at the end of September this year.

The investment income from foreign currency assets disclosed by the Bank of Korea is also based on book value, which does not reflect market value fluctuations due to interest rate changes, so it may not accurately match the actual income.

The method of securing cash may also change. For now, 20 billion dollars in cash must be raised each year, but once the investment reaches a stable phase and begins to generate returns, these proceeds may be reinvested as funding for U.S. investments. Bank of Korea Governor Rhee Changyong also mentioned the possibility of such an approach during a recent National Assembly audit.

However, variables remain. Depending on global market conditions, there may be losses in the investment income from foreign currency assets. In fact, in the case of KIC, over the past 20 years, there have been four years in which the scale of foreign currency asset management decreased, or the annual increase in managed assets did not keep pace with new entrusted funds.

Opportunity Cost of 'Reinvestment' Disappears with Cash Conversion for U.S. Investments... Will Bank of Korea's Management Principles Change?

Until now, the interest and dividend income generated from managing foreign currency assets has been reinvested. Similar to typical fund management, the returns were not converted into cash but used to purchase bonds and stocks, continually growing the asset base. However, as these returns are now being used as funding for U.S. investments, the existing management approach is expected to change. Although foreign exchange reserves are unlikely to be used for cash funding for U.S. investments, the opportunity cost of reinvesting investment income to grow foreign currency assets will effectively disappear. Lee Junghwan, Professor at Hanyang University’s College of Economics and Finance, stated, "In broad terms, when the Bank of Korea generates income, that income is returned to the government, so taking that income away could, in a sense, reduce tax revenue."

There is also interest in whether the Bank of Korea’s foreign currency asset management principles, which have so far focused on stability and liquidity, will be partially adjusted. Unlike KIC, the Bank of Korea emphasizes preserving the current value of foreign currency assets and maintaining a portfolio that can be sold at any time to respond to market conditions. Profitability is considered only after these priorities, and the Bank of Korea is known to quantify and combine these principles in its management approach.

However, as the Bank of Korea’s investment income from foreign currency assets is now being used as funding for U.S. investments, there may be a need to reconsider these principles. Investing in products with higher yields or larger dividends could make it easier to secure funding for U.S. investments. Currently, the majority of foreign currency assets are concentrated in bonds (about 79%). A Bank of Korea official stated, "It is true that we are entering a new phase," adding, "Maintaining stability is important, but we also need to consider cash flow."

Internally, it is expected that the principles of stability and liquidity will not change. A Bank of Korea official said, "Pursuing profitability is a double-edged sword. While we could respond by seeking higher returns to cover expenditures, investing in risky assets means both gains and losses are possible." Joo Jaehyun, Director of the Bank of Korea’s Foreign Exchange Reserve Management Department, also stated, "Profitability is achieved only as a secondary goal, provided that both liquidity and stability are satisfied."