South Korea’s Monetary Authority Moves to Stabilize Won
The Monetary Authority is looking to engage the National Pension Service (NPS) in efforts to curb the depreciation of the won against the US dollar, officials revealed on Monday.
This initiative comes as the NPS, which is South Korea’s state-managed pension fund, broadens its overseas investments from its sizable asset base exceeding 1.4 trillion won (around $948.38 billion).
A considerable investment of this scale, potentially amounting to hundreds of trillions of won, necessitates converting large sums of won into dollars. This situation could lead to capital outflows, drawing concerns as the exchange rate surpasses the concerning 1,400 won mark.
During Monday’s intraday trading, the won slipped by 1.5 won, closing at 1,477.1 won per dollar. This reflects a sixth consecutive day of losses, marking the currency’s lowest point in seven months.
The Ministry of Economy and Finance announced that it convened a closed-door meeting with the Bank of Korea (BOK), NPS, and the Ministry of Health and Welfare, the body overseeing the NPS. This four-party meeting was the first since discussions on November 14, when Deputy Prime Minister Koo Yoon-cheol and BOK Governor Lee Chang-young emphasized harmonizing efforts with main market players, including the NPS.
A Treasury official noted that the discussions primarily revolved around managing currency fluctuations stemming from the NPS’s substantial overseas investments, though specific details were not disclosed.
There are speculations that the NPS’s involvement in currency hedging may also have been a topic of discussion. This could involve bolstering dollar supply in the market by liquidating some foreign assets, such as U.S. dollar-denominated stocks and bonds, particularly if the won-dollar exchange rate escalates significantly.
It’s noted that as much as 10% of the NPS’s overseas assets might be designated for currency hedging purposes, with flexibility in adjusting this ratio based on market conditions.
Nonetheless, concerns linger that utilizing the NPS as a mechanism for stabilizing exchange rates could adversely affect the management of citizens’ retirement funds. An unnamed economics professor mentioned that the government must carefully navigate the utilization of the NPS to stabilize the exchange rate without sacrificing investment returns.
Some officials further indicated that the government and NPS are contemplating an increase in the share of domestic investments. They highlighted that augmenting domestic stock holdings might moderate the NPS’s conversion into won, consequently alleviating foreign exchange market pressures.
Meanwhile, Minister of Health and Welfare Jung Eun-kyung urged the NPS’s fund management team to act swiftly, guided by thorough market analyses, to ensure profitability and stability for the NPS. He pointed out that the NPS’s overseas investments are on the rise, predicting they will reach approximately 702 trillion won in 2024.
