Foreign exchange reserves suffer largest fall since 2008
Country advised to secure more reserves against worse-case scenario
By Lee Min-hyung
Korea's foreign exchange reserves reported the biggest monthly decline in June since the 2008 global financial crisis, as authorities sold foreign currencies to defend a sharp depreciation of the Korean won.
According to the Bank of Korea (BOK), the figure reached $438.28 billion won as of the end of last month. This is a drop of $9.43 billion from a month earlier.
The foreign exchange reserves have fallen since November of last year. It has particularly been on a sharp decline since March of this year when the U.S. Fed started its first rate hike in response to the pandemic.
“The foreign exchange reserves dropped in June, as authorities sold the dollar to mitigate volatility in the foreign exchange market amid the strengthening dollar,” an official from the central bank said. The won-dollar exchange rate has soared to around the 1,300-won mark, up by about 60 won from a month earlier, on the growing preference for safe assets such as the U.S. dollar.
Korea secured foreign reserves worth $447.7 billion in May, the world's ninth-largest. Asian economic powerhouses such as China and Japan increased their foreign reserves during the same period, while those of Korea, Russia, Hong Kong and Singapore declined.
Last year, Korea's foreign exchange reserve ratio fell to 98.94 percent, the lowest since 2000, according to data from the International Monetary Fund (IMF). Under the IMF's recommendation, each country is advised to maintain the ratio at around 100 to 150 percent. The ratio is calculated by combining 5 percent of its annual exports, 5 percent of its money supply, 30 percent of current foreign debt and 15 percent of foreign exchange securities and other investments.
But given the falling foreign exchange reserves this year, the ratio is feared to drop further in 2022.
Experts advised authorities to secure more foreign reserves amid looming fears of an economic crisis. The Korean economy is faced with growing concerns over a perfect storm of rising prices, falling stock prices and foreign exchange volatility.
“Korea's foreign exchange reserves-to-GDP ratio stands at 28 percent, which means the economy is highly vulnerable to possible foreign exchange crises,” Sejong University business professor Kim Dae-jong said. “This is merely half of the recommendation by the Bank for International Settlements (BIS). Korea is advised to increase the ratio to around 90 percent just like Taiwan, which has never suffered any foreign exchange shocks.”
The IMF and BIS advise Korea to secure foreign exchange reserves worth $681 billion and $930 billion, respectively.
The country's trade reliance is 75 percent of the annual GDP, so the economy remains highly vulnerable to the volatile foreign exchange market, according to Kim.
“Authorities should also increase the portion of cash in its foreign reserves to around 30 percent from the current 5-percent level,” he said.
As the global economy is faced with escalating uncertainties, the government needs to take immediate steps to sign currency swap deals with the United States and Japan, he added.
“The government should not sit on its hands over reaching the currency swap deals with the two countries, but instead, needs to take more active steps to clinch timely swap agreements,” he said.
Yonsei University economics professor Sung Tae-yoon also expressed concerns over the falling foreign reserves.
“The status quo appears not to be highly worrisome, but if the figures keep declining for the next few months, this will weigh heavily on the economy and heighten uncertainties in the financial market here,” he said.