The government’s new entrusted operating funds for the Korea Investment Corporation (KIC), the sovereign wealth fund, have effectively ceased from 2022 until last year. Some argue that the KIC faces concerns about its international competitiveness. In a landscape where competing sovereign wealth funds leverage substantial financial support as a weapon to secure lucrative global assets, the worry is that the KIC, experiencing a halt in new investment capital, may see a weakening of its competitive position.
According to the Ministry of Economy and Finance (MOEF) and the KIC on Jan. 7, the new entrusted funds for the KIC from 2022 to 2023 totaled only US$500 million. In 2022, the KIC did not receive any new entrusted funds for the first time since its establishment in 2005. Last year, it secured approximately US$500 million (70 billion yen) through yen-denominated foreign exchange equalization bonds issued with the aim of restoring relations with Japan. This marked the entirety of the new funds received. Historically, the KIC has annually received new entrusted funds ranging from at least US$4 to 5 billion on average under different administrations, reaching as high as US$11 to 12 billion. However, there has been a noticeable cessation of the financial influx over the past two years. Notably, the KIC received US$14.8 billion during the early years of the Roh Moo-hyun administration from 2006 to 2007, US$35.2 billion during the Lee Myung-bak administration from 2008 to 2012, US$45 billion during the Park Geun-hye administration from 2013 to 2016, and US$22.1 billion during the Moon Jae-in administration from 2017 to 2021.
Since 2022, the foreign exchange authorities have been releasing foreign exchange reserves until last year to stabilize the exchange rate, primarily in response to the global interest rate hikes and the strengthening U.S. dollar. The KIC manages entrusted foreign currencies from the MOEF and the Bank of Korea. The foreign exchange reserves, amounting to US$463.1 billion at the end of 2021, decreased to US$420.15 billion at the end of last year.
Last year, the KIC faced another financial challenge as a substantial tax revenue shortfall led to the depletion of another funding source, the Foreign Exchange Stabilization Fund. When the MOEF encountered a tax revenue shortfall of 54 trillion won (US$41.03 billion) last year, it implemented an “austere measure” by drawing 20 trillion won from the Foreign Exchange Stabilization Fund to address the challenges posed by exchange rate fluctuations.
Concerns are emerging within the financial sector regarding the potential decline in the competitiveness of the KIC due to its unstable entrusted structure, influenced by fluctuations in the foreign exchange market and other factors. Long-term investors such as sovereign wealth funds and pension funds consider the acquisition of new entrusted funds as a key factor for enhancing returns.
Some suggest that there is a need to explore options for expanding the means of securing funds for the KIC. Norway’s sovereign wealth fund, NBIM, and Middle Eastern sovereign wealth funds leverage profits from resource development, such as oil and natural gas, as funding sources. The Government of Singapore Investment Corporation utilizes public pension funds and government surpluses as funding sources, in addition to foreign exchange reserves.