'Highest Exchange Rate Since the Crisis' Emergency Measures... Authorities to Review Corporate Dollar Hoarding [Why&Next]

Foreign exchange authorities have ramped up their efforts to defend the rapidly falling value of the Korean won. Following the extension of the foreign exchange swap between the National Pension Service and the Bank of Korea, they now plan to meet with export companies to request that they refrain from "hoarding dollars." Authorities believe that major domestic exporters are fueling the dollar shortage and the depreciation of the won by holding onto dollars earned overseas instead of exchanging them in the market, as they are betting on a weaker won. If the current trend continues, the average annual exchange rate this year is expected to surpass the level seen during the International Monetary Fund (IMF) foreign exchange crisis.

According to relevant ministries on the 16th, a meeting with major domestic export companies, organized by the Ministry of Economy and Finance, is scheduled for this morning. The meeting, presided over by First Vice Minister Lee Hyungil, will be attended by officials including the Director General of International Finance and representatives from major export companies. This gathering is a follow-up measure to the comprehensive plan for stabilizing the foreign exchange market announced by the government on the 1st, and is intended to review the foreign exchange and cash management situations of export companies. Previously, the Ministry of Economy and Finance had requested data on foreign exchange performance and overseas investment records from leading export companies in key industries, such as Samsung, SK, Hanwha, and HD Hyundai.

Authorities believe that the "leading and lagging" strategies employed by these exporters are exacerbating instability in foreign exchange supply and demand. Major exporters in Korea are either delaying the conversion of dollars earned overseas into won during periods of rising exchange rates (lagging), or purchasing dollars in advance for payments such as raw material costs (leading). Such currency management strategies by companies are contributing to the dollar shortage in the market and fueling expectations that the upward trend in the exchange rate will persist for some time.

In fact, the dollar deposit balances of companies have been rising rapidly. According to the Bank of Korea, as of the end of November, the dollar deposit balance held by companies at the five major commercial banks in Korea stood at 53.74 billion dollars, a sharp increase of about 21% from the previous month (44.3 billion dollars), marking the largest monthly increase this year. Companies have been increasing their dollar holdings in anticipation of a weaker won and to secure 350 billion dollars for investments in the United States, resulting in a rapid rise in dollar deposit balances.

Authorities are considering expanding incentives linked to tax and policy finance measures to encourage companies to sell dollars. One key measure under review is raising the non-taxable income ratio for dividends from overseas subsidiaries from the current 95% to 100%, thereby eliminating corporate tax burdens when profits earned overseas are brought into Korea and exchanged. Authorities are also considering linking policy fund support from institutions such as the Export-Import Bank of Korea and the Korea Development Bank to companies' foreign exchange performance.

The Ministry of Economy and Finance has been holding a series of urgent meetings, including a joint emergency economic ministers' meeting over the weekend that involved not only financial and foreign exchange authorities but also the Ministry of Health and Welfare and the Ministry of Trade, Industry and Energy. Foreign exchange authorities estimate that 70% of the recent increase in the exchange rate is due to supply and demand factors, such as increased overseas investment by the National Pension Service and individual investors investing abroad, and are therefore intensifying their intervention.

On the previous day, Choi Jiyeong, Deputy Minister for International Economy at the Ministry of Economy and Finance, reportedly attended a meeting of the Fund Management Committee, the highest decision-making body of the National Pension Service, and conveyed the government's view that dollar investments without hedging should be avoided. At the meeting, the National Pension Service approved an extension of its foreign exchange swap with the Bank of Korea, with a ceiling of 65 billion dollars, until the end of next year. The expiration date for the provision that allows for strategic currency hedging through dollar sales was also extended until next year. In 2022, at the request of the Ministry of Economy and Finance and others, the National Pension Service established a provision in its management guidelines allowing the strategic hedging ratio to be raised to up to 10%, but there has been no officially confirmed case of this provision being exercised so far.

Despite the government's various measures, the exchange rate shows no sign of declining. Last month's average exchange rate, based on weekly closing prices, was 1,460.44 won, the highest monthly average since March 1998 (1,488.87 won) during the foreign exchange crisis. The psychological defense line for the exchange rate, as viewed by the government, is in the high 1,480 won range, which was the annual high (1,487 won on April 8) set during the tense period before the current administration took office. If the current trend continues, the average annual exchange rate this year is expected to be around 1,445 won (based on the closing price on the 15th), surpassing the 1998 level (1,394.97 won) and reaching a record high.