(Bloomberg) -- South Korea will cut the size of its foreign exchange stabilization fund by more than 30% next year, a record amount, though the government says that’s still sufficient to defend the won.
The move comes after the South Korean currency fell 3.7% versus the US dollar year-to-date through the end of August, making it the second-worst performer in Asia behind the Taiwanese dollar.
“The amount of foreign exchange reserves is sufficient, and the size of the fund’s assets is also sufficient to respond to the foreign exchange market,” Hee Jae Kim, director of the foreign exchange market division of South Korea’s finance ministry, told Bloomberg News in a phone interview Monday.
“A reduction in the size of the fund does not necessarily imply a reduction in its ability to respond to the foreign exchange market,” he added.
The government plans to slash the size of the foreign exchange stabilization fund in 2025 to 140.3 trillion won ($104.6 billion), from 205.1 trillion won allocated this year. The cut reflects the deepest reduction in the fund was since it was established in 1967 to counter excessive volatility in the won.
“Impact of reduction would be minimal as the foreign exchange reserve is now more than three times short-term external debt of South Korea” said Min Gyeong-won, an economist at Woori Bank in Seoul. “If the won falls, corporations would sell dollars from their FX deposits. If the currency rises, dollar demand of mom and pop investors for overseas stock investment would follow.”
The won’s swings have put South Korean authorities on edge this year. In April the finance ministry’s international finance bureau and Oh Kum-hwa, director general of the Bank of Korea’s international department, issued a joint text message, saying they were closely watching exchange rate movements after the currency fell to 1,400 per dollar — the lowest since 2022.
The government has extended the currency’s trading hours since July as part of the nation’s push to get its stocks and bonds included in more global indexes, though greater volatility is also possible during times of lower liquidity.
Earlier, Korea Economic Daily reported the government plans to trim the fund’s size.
(Adds chart, quote from Woori in sixth paragraph.)
©2024 Bloomberg L.P.