Enough to Avert Financial Crisis?

South Korea’s foreign exchange reserves topped US$400 billion in June for the first time.

According to the Bank of Korea on July 4, Korea's forex reserves reached US$400.3 billion at the end of last month by gaining US$1.32 billion from May.

For reference, the amount was US$3.9 billion during the 1997 Asian financial crisis and US$200.5 billion during the global financial crisis in 2008.

Under the circumstances, debate has been rekindled regarding the optimum level of South Korea’s foreign exchange reserves. According to the IMF’s criteria, the optimum level is US$381.4 billion to US$572.1 billion. Yet it is more than US$600 billion according to those of the BIS.

Debate is also underway with regard to the opportunity cost related to the forex reserves. Trillions of won a year is required for South Korea to maintain its forex reserves. In addition, its government debt increases every time the government issues foreign exchange stabilization bonds.
 

Some experts point out that the amount is not that much considering the fact that the reserves are a kind of contingency plan and the cost of a financial or foreign exchange crisis overwhelms the amount in most cases. They mention Argentina as an example. In March this year, Argentina’s foreign exchange reserves totaled US$61.73 billion, slightly less than the optimum level of US$65.23 billion recommended by the IMF. Still, the country could not avoid a bailout.

In the meantime, the foreign exchange authorities of South Korea are regarding the current forex reserves as appropriate.