(Bloomberg) -- South Korea will triple the maximum amount of foreign currency that the National Pension Service can buy in advance to $3 billion per month starting October, to mitigate foreign exchange market fluctuations as the pension fund seeks to boost its overseas investments.
The previous ceiling for the advance purchase was set at $1 billion per month, when the fund signed the initial swap agreement in 2022.
It is unclear whether the pension fund has exhausted the previous limit or how much buffer is left. The pension will be allowed to buy $6 billion of foreign currency per quarter, and $150 million per day, under the new guidelines. The daily average dollar-won spot trading turnover of was $11.1 billion in August, according to the Bank of Korea.
South Korea’s $860 billion pension fund is planning to increase overseas investments to boost returns and the government is keen to avoid abrupt moves in the forex markets. The South Korean won is down more than 3% this year, making it one of Asia’s worst performing currencies in 2024.
The fund’s dollar demand has been cited as one of the reasons for the won’s weakness.
“Advance purchase is to minimize the impact on the foreign exchange market by spreading out the foreign currency needs of the National Pension Service,” the Ministry of Health and Welfare said in a statement after the fund management committee met on Thursday.
The pension plans to increase the weight of overseas stocks, currently the largest asset class in its portfolio, to 35.9% while cutting the ratio of domestic bonds to 26.5% by the end of 2024, according to the mid-term allocation plan released in May. The weight of overseas stocks in the pension was 34.1% at the end of June, as shown in the web page of the fund.
In June, South Korea’s finance ministry and the Bank of Korea agreed to expand the size of the foreign exchange swap deal with the National Pension Service to $50 billion from $35 billion until the end of 2024. That agreement was aimed at alleviating the supply-demand imbalances caused by the fund’s US dollar spot purchase during unstable markets, according to the statement.
The other issues discussed in Thursday’s meeting, according to the statement:
- The National Pension Service will also implement ‘Dialog with Companies’ for overseas firms that the fund invested in.
- The dialog is a continuous communication with companies on issues closely related to corporate value, such as dividend policy, climate change, and industrial safety, to induce voluntary improvements.
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