Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Gov't plans new NPS framework amid fund’s growing overseas investments, won’s sharp decline
Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol speaks during a press conference at Government Complex Sejong, Wednesday. Yonhap
By Yi Whan-woo
Effectiveness of framework in balancing investment returns, currency stabilization remains unclear
The government plans to establish a new business framework for the National Pension Service (NPS) amid its growing overseas investments and the won’s sharp decline, Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol said Wednesday.
As Koo explained, the framework is intended to ensure that the state-run pension fund not only fulfills its primary goal of optimizing investment returns but also contributes to stabilizing the currency market.
However, he did not specify how the framework would achieve these dual goals, which may conflict, as NPS might need to sell its U.S.-denominated assets at the expense of returns to slow the won’s depreciation.
Koo additionally emphasized that the framework should not be misperceived as a mere short-term tool to mobilize NPS in service of curbing the won’s decline.
“We have launched discussions to establish a new framework for NPS to harmonize the fund’s profitability with foreign exchange market stability,” Koo said during a press conference at Government Complex Sejong.
“We will discuss both short-term actions possible under NPS’ current system as well as medium- to long-term institutional improvements,” he added, referring to the first meeting of a four-party consultative body on Monday, comprising the Ministry of Economy and Finance, Bank of Korea, NPS and the Ministry of Health and Welfare, under which NPS operates.
The discussion focused on NPS’ overseas investments, estimated at more than 580 trillion won ($395.58 billion), which have weakened the Korean currency by requiring substantial conversions of won into dollars and driving capital outflows.
Such investments, combined with exporters’ practice of retaining overseas dollars and rising U.S. stock purchases by retail investors, have kept the Korean currency near the worrisome threshold of 1,400 won per dollar.
The government-led discussion helped the won recover after hitting a seven-month low of 1,477.1 at the close of Monday’s trading session.
It rose for two straight sessions afterward, including Wednesday, when it gained 6.8 won to finish at 1,465.6.
The finance minister highlighted the need for the framework, given NPS’ large size, noting its asset pool of over 1,400 trillion won — about 50 percent of Korea’s gross domestic product.
He added that its overseas assets surpass Korea’s foreign reserves and are expected to increase as the fund is forecast to surpass 3,600 trillion won.
“NPS is certainly playing the largest role among individual players in the foreign exchange market,” he said. “Given that the fund’s returns are measured in won, sharp short-term increases or decreases in its investment share could raise concerns about greater currency market volatility.”
Koo also noted that “in the long term, the process of liquidating the fund could affect pension resources.”
He added, “The government will respond if volatility becomes excessively high, and we will take decisive action correspondingly.”
Asked how the framework can ensure both NPS’ profitability and currency market stability, Koo said, “It is difficult to provide specifics at this time. Nothing has been decided yet regarding the framework’s operational period and targets, and these will be determined based on the outcomes of the consultations.”
He went on to say, “The framework is not intended as a temporary measure to mobilize the pension fund in response to the won’s weakening.”
As for currency hedging as an option to reduce the adverse effects of NPS’ overseas investments, Koo said it should be determined by the fund management committee, chaired by Minister of Health and Welfare Jeong Eun-kyeong.