Korea's weak forex reserves exposed after U.S. currency monitoring removal

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

The United States removed Korea from its currency monitoring list on Tuesday, exposing the country’s reduced foreign exchange reserves as well as its decline in exports.

Korea was removed from the list after seven years. It had been on it since April 2016, excluding 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 material current account surplus of more than 3 percent of a country’s GDP, or persistent one-sided intervention in the foreign currency market — are named on the list.

U.S. removes Korea from currency monitoring list

Korea’s removal from the monitoring list cannot be seen merely in a positive light. The only criterion met by Korea is in the category of trade surplus with the United States, which amounts to $38 billion, according to the U.S. Treasury's report on Tuesday. The domestic material current account surplus has gone over 3 percent of the country’s GDP before, but it plummeted to 0.5 percent in this evaluation. That means January’s material current account deficit, amounting to $4.21 billion and the largest ever recorded, was caused by drops in exports.

Moreover, Korea is far from meeting the criteria of being a net seller of dollars. This is because the United States has been consistently selling dollars on a net basis to protect its currency after the U.S. Federal Reserve raised key interest rates last year. Korea’s net dollar sales amounted to $46 billion last year, according to the Bank of Korea (BOK). Around $8.1 billion were sold on a net basis until the end of this year’s second quarter.

Foreign exchange reserves were at $412.9 billion as of the end of last month. It is at the lowest amount in 40 months since June 2020, when it stood at $410.8 billion. Compared to the largest amount of $469.2 billion in reserves in October 2021, it is a decrease of $56.3 billion.

Foreign currency reserves are seen as protection against emergencies and unforeseen events. There is always debate on what is the adequate amount for the reserves. As of late September, Korea’s foreign reserves placed 9th on global rankings, with China, Japan and Switzerland in the top three, in that order. It is more than twice the amount saved in late 2008, after the global financial crisis hit.

Korea’s financial soundness, determined by the country’s short-term foreign debt, is also in good shape. Since 2014, the country has been a net creditor with more investment assets than overseas debt.

In response to a question about whether foreign exchange reserves should be increased, BOK Gov. Rhee Chang-yong replied that he “does not think the amount is insufficient at all.”

“It also costs to increase foreign exchange reserves so we are monitoring [financial] activity, such as currency rates,” he said.

That is not to say the country must stay complacent. Korea’s foreign exchange reserves in relation to GDP stood at 25 percent last year, in stark contrast to China, Taiwan and Singapore’s ratio spanning 60 to 100 percent.

The International Monetary Fund (IMF) last year calculated Korea’ Assessing Reserve Adequacy (ARA), a metric that assesses the adequacy of reserve holdings, as 97 percent. It is below the recommended standard of 100 to 150 percent.

Korea is especially sensitive about storing foreign exchange reserves after the nation’s traumatic experience of going through the Korean financial crisis of 1997.

“Under the current system, Korea’s heavy reliance on exports makes it vulnerable to outside shocks, and cash and cash equivalents that can be immediately mobilized in the case of crisis only amounts to under 10 percent of foreign exchange reserves,” said Kim Dae-jong, business professor at Sejong University.

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

BY KIM KI-HWAN, KIM JU-YEON [kim.juyeon2@joongang.co.kr]