Interest Rates on Foreign Currency Deposits Rise
U.S. dollar-denominated deposits at five commercial banks in South Korea increased US$5 billion (5.65 trillion won) in three months due in large part to a rise in foreign currency deposit interest rates and a stronger preference for risk-free assets.
The amount of U.S. dollar-denominated savings held by five banks, including KB Bank, Shinhan Bank, Woori Bank, KEB Hana Bank and NH Nonghyup Bank, came to US$40.14 billion (45.34 trillion won) as of the end of January, up 14 percent from US$35.11 billion (39.66 trillion won) in October last year, according to banking industry sources on Feb. 17. The figure went up to the level of US$39.69 billion (44.83 trillion won) in April last year.
Banking industry analysts said that this was because interest rates on foreign currency deposits were higher than those of won-denominated savings and commercial banks expanded their marketing activities to expand foreign currency deposits as well. Some banks carried out a marketing campaign to offer a special interest rate for U.S. dollar-denominated savings in the second half of last year.
Another factor is that investors, mainly those who have assets worth more than 3 billion won (US$2.66 million), recently invested some of their assets in dollar-denominated products, which are risk-free assets. Yeon Kwang-hee, chief of Shinhan Bank PWM Jamsil, said, “It is good for investors to allocate 10 to 20 percent of their assets to U.S. dollar-denominated assets in order to respond to volatility. Investors seem to prefer a deposit which pays interest when they do this. We offer U.S. dollar-based bonds which are safe and pay a good interest and those who have the propensity to investment even invest in equity linked securities in U.S. dollar.”
Investors are growing more and more interested in U.S. dollar products since the U.S. dollar, which is a risk-free asset, is highly likely to be stronger when the economy slows down further. The won-dollar exchange rate closed at 1,128.70 won on Feb. 15, up 3.60 won from a day earlier.
There has also been an increase in investments in U.S. dollar-denominated repurchase agreements (RP) sold by securities companies. The amount of U.S. dollar RP investments as of Feb. 14 grew by 21.11 percent from the level at the beginning of the year. The numbert of U.S. dollar RP accounts also increased 47.62 percent from 2,209 to 3,261 over the same period.
A U.S. dollar RP is a form of short-term borrowing. The dealer sells the U.S. dollar-denominated bonds to investors and buys them back shortly afterward at a slightly higher price. As market experts expect that the U.S. dollar will get stronger with an additional base rate increase by the U.S. Federal Reserve, the interest rate in U.S. dollar RPs increased as well as related investments. In fact, NH Investment & Securities said that the earnings rate of U.S. dollar RPs stood at 2 percent as of December last year when investors hold them for seven to 30 days. The figure went up by 0.6 percentage points from 1.4 percent in July last year.