More Than What Is Actually Required?
South Korea’s foreign exchange reserves reached US$405.51 billion last month, increasing by US$1.82 billion in just one month and hitting an all-time high yet again. The reserves broke the US$400 billion mark for the first time in history in June 2018 before hitting a record high for the third consecutive month in January 2019.
This can be attributed to a weak dollar. The U.S. Dollar Index (DXY) reached 95.34 at the end of last month, down 1.1 percent from a month ago. Meanwhile, the British pound and the Australian dollar appreciated 3.3 percent and 2.8 percent vis-a-vis the U.S. dollar, respectively. As a result, the U.S. dollar-converted value of the Bank of Korea’s non-U.S. dollar-denominated assets increased to result in the increase in forex reserves.
Some experts point out that the increase in forex reserves can be helpful for South Korea, a small open economy, with uncertainties mounting due to the ongoing trade war between the United States and China. For reference, the IMF mentioned in November last year that South Korea’s adequate foreign exchange reserves are US$382.8 billion to US$574.3 billion.
Other experts, however, say the South Korean government and the Bank of Korea do not have to pay an excessive amount of money to maintain the reserves that can be compared to an emergency fund. At present, South Korea is issuing bonds with interest burden to accumulate foreign currencies and concentrating its investment on low-return safe assets such as the U.S. government bonds, which leads to an estimated valuation loss of trillions of won a year. In addition, South Korea’s short-term debt-to-forex reserves ratio dropped from 286.11 percent in 1997 to 31.8 percent in September 2018, which means South Korea’s current forex reserves may be more than what is actually required.