Korea’s weak foreign exchange reserves were exposed after the removal of US currency monitoring

Korea’s foreign exchange reserves in 2023 [JOONGANG PHOTO]

The United States removed Korea from its currency watch list on Tuesday, revealing the country’s reduced foreign exchange reserves as well as its export decline.

Korea was removed from the list after seven years. It has been on it since April 2016, with the exception of a brief respite in the first half of 2019.

Countries that meet at least two of three criteria—a bilateral trade surplus of over $15 billion with the United States, a significant current account surplus of more than 3 percent of the country’s GDP, or persistent unilateral foreign exchange intervention—are named on the list.

The removal of Korea from the monitoring list cannot be viewed only positively. The only criterion that Korea meets is the trade surplus category with the United States, which stands at $38 billion, according to a report from the U.S. Treasury Department on Tuesday. The domestic material current account surplus previously exceeded 3 percent of the country’s GDP, but fell to 0.5 percent in this assessment. This means January’s material current account deficit of $4.21 billion, the largest ever recorded, was driven by a drop in exports.

Moreover, Korea is far from meeting the criteria of a net seller of dollars. That’s because the United States has been consistently selling dollars on a net basis to protect its currency after the U.S. central bank raised key interest rates last year. Korea’s net dollar sales reached $46 billion last year, according to the Bank of Korea (BOK). By the end of this year’s second quarter, net sales were around $8.1 billion.

Foreign exchange reserves stood at $412.9 billion at the end of last month. It is the lowest amount in 40 months since June 2020, when it was $410.8 billion. This is a drop of $56.3 billion from the peak of $469.2 billion in reserves in October 2021.

Foreign exchange reserves are considered to protect against extraordinary events and unforeseen events. There is always a debate about what is an adequate amount for reserves. As of the end of September, Korea’s foreign reserves ranked 9th in the global rankings, with China, Japan and Switzerland in the top three, respectively. This is more than double the amount saved at the end of 2008, after the outbreak of the global financial crisis.

Korea’s financial health, as determined by the country’s short-term foreign debt, is also in good shape. As of 2014, the country is a net creditor with more investment assets than foreign debt.

Asked whether foreign reserves should be increased, BOK Governor Rhee Chang-yong said he “doesn’t think the amount is insufficient at all.”

“It is also worth increasing the foreign exchange reserves, so we are watching that [financial] activities such as exchange rates,” he said.

This does not mean that the country must remain complacent. Korea’s foreign exchange reserves as a percentage of GDP last year stood at 25 percent, in sharp contrast to China, Taiwan and Singapore’s ratio, which ranges from 60 to 100 percent.

Last year, the International Monetary Fund (IMF) calculated Korea’s Assessing Reserve Adequacy (ARA) metric, which assesses the adequacy of reserves held, as 97 percent. It is below the recommended standard of 100 to 150 percent.

Korea is particularly sensitive to the accumulation of foreign exchange reserves following the nation’s traumatic experience in the 1997 Korean financial crisis.

“Under the current system, Korea’s heavy dependence on exports is vulnerable to external shocks, and cash and cash equivalents that can be immediately mobilized in the event of a crisis are less than 10 percent of foreign exchange reserves,” Kim Dae-jong said. , a business professor at Sejong University.

“As the international financial crisis grows along with the trend of a stronger dollar, we must take the issue of reducing foreign exchange reserves seriously,” he added.

BY KIM KI-HWAN, KIM JU-YEON [[email protected]]

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