Foreign reserves approaching $300 billion

By Kang Seung-woo

Korea’s foreign exchange reserves reached a new record high in October on the strength of an increase in the conversion value of other currencies against the U.S. dollar, the central bank said Tuesday.

The Bank of Korea (BOK) said that the nation’s foreign reserves amounted to $293.35 billion as of the end of October, compared with the previous record of $289.78 billion in September.

It was the fourth time this year that the reserves hit a fresh record high following April, July and September. The figures from July and April were $285.96 billion and $278.87 billion, respectively.

The BOK said the increase was due to growth in the U.S. dollar conversion value of assets in other currencies such as the euro and pound, which strengthened against the greenback over the past month.

“The reserves climbed mainly because investment profits rose and a stronger yen, euro and pound raised their dollar conversion value,” Moon Han-geun, an economist at the BOK, said.

The U.S. dollar lost ground against major currencies on the prospect of additional monetary easing by the U.S. Federal Reserve last month. As a result, the yen rose 3.7 percent to the dollar, and the euro gained 2.1 percent against the greenback. The pound also increased 2.0 percent.

The foreign reserves are expected to breach the $300 billion mark by the end of this year because a weak U.S. dollar is likely to continue. The reserves consist of securities and deposits denominated in overseas currencies along with International Monetary Fund (IMF) reserve positions, special drawing rights and gold bullion.

“The foreign reserves are on the rise, but it is uncertain that they will reach $300 billion because we do not know how the value of international currencies will fluctuate,” Moon said.

With the foreign reserves nearing $300 billion, there are renewed concerns over the excess level of currency reserves.

Critics say that holding too much in foreign reserves can cause unnecessary costs for the country as the rising reserves result in floatation of monetary stabilization bonds.

The interest payments on these bonds are higher than gains from investment in U.S. treasuries. In addition, the interest payments increase market liquidity, which may affect the government’s policies.

However, economists say that it has yet to reach such a serious level.

“I cannot say Korea’s foreign reserves are at an optimum level, but the current situation is not at a level that requires the central bank to artificially cut the total,” said Kwon Soon-woo, chief economist at Samsung Economic Research Institute (SERI).

LG Economic Research Institute economist Lee Chang-seon echoed the view, saying, “Depending on which standard you have, there can be a great diversity of views on it. But the current situation is moderate by and large.”