The strength of the U.S. dollar, along with measures to stabilize the market and prevent further depreciation of the South Korean won, has resulted in a decline in foreign exchange reserves for the third consecutive month.
According to foreign reserves statistics released by the Bank of Korea on Nov. 3, the country’s foreign reserves at the end of October stood at US$412.87 billion, a reduction of US$1.24 billion from the end of the previous month.
South Korea’s foreign exchange reserves had increased in June and July before turning to a downward trend from August onward.
The continuing decrease in foreign reserves is attributed to the decline in the dollar-converted value of other currencies like the Chinese yuan and the measures taken by the foreign exchange authorities to mitigate market volatility to prevent a drop in the value of the won.
Indeed, in October, the value of the Chinese yuan depreciated by 0.5% against the dollar. The Australian dollar also depreciated by 0.4% during the same period. The Japanese yen saw a decrease in value by 0.1%. This means that the value of these currencies held by South Korea has decreased when converted to U.S. dollars.
Measures to ease the strong dollar by authorities intervening to reduce forex market volatility also impacted the reduction in foreign reserves. An official from the Bank of Korea mentioned, “There was also a temporary effect on the decrease in foreign reserves due to the currency swap with the National Pension Service.”
Breaking down the foreign reserves by asset type, securities such as government and corporate bonds (US$369.98 billion) decreased by US$2.6 billion from a month earlier. The “IMF Position,” which represents the withdrawal rights in convertible currency from the International Monetary Fund (IMF), decreased by US$110 million to US$4.45 billion. Special Drawing Rights (SDRs) diminished by US$30 million, amounting to US$14.77 billion.
On the other hand, deposits increased by US$1.47 billion to US$18.87 billion compared to the previous month.
Gold reserves remained unchanged at US$4.79 billion, as they are recorded at the price at the time of purchase and do not reflect the current market price.
As of the end of September, South Korea’s foreign exchange reserves (US$414.12 billion) were ranked 9th in the world. The ranking has been maintained since South Korea gave up the 8th position to Hong Kong at the end of August. The country with the largest reserves is China (US$3.1151 trillion), which saw a decrease of US$45 billion from the end of August, followed by Japan (US$1.2372 trillion), Switzerland (US$818.4 billion), India (US$587.7 billion), Russia (US$569 billion), Taiwan (US$564 billion), Saudi Arabia (US$439.3 billion), and Hong Kong (US$415.7 billion).
There are concerns that the rapid depletion of foreign exchange reserves is eroding the “forex breakwater.” In fact, South Korea’s Assessing Reserve Adequacy (ARA) indicator by the IMF was below the adequate standard of 100-150% last year, showing 97.0%. This index is an auxiliary indicator to evaluate the appropriate level of foreign reserves of each country, based on short-term external debt, money supply, export volume, portfolio, and other investment liabilities. Considering the recent reduction in foreign exchange reserves compared to the end of last year, it is possible that this index has dropped even further.
In relation to this, the Bank of Korea stated, “The IMF assesses a country’s foreign exchange soundness by evaluating various factors, including this indicator, the country’s forex policies, and the size of net foreign assets.” The IMF, after concluding its recent annual consultation, clarified in a press briefing that “the ARA is a tool primarily used for the structure of emerging market economies, and as of this year, it will not be included in the reports on South Korea.”