KRW strength slips as RIA draws 480 billion won

90,000 accounts in about 10 days after launch

FX reserves at end-March down $4.0bn

The Returning Investment Account (RIA), introduced last month to stabilize the foreign-exchange market, pulled about 480 billion won of funds back onshore in roughly 10 days after launch. The won-dollar exchange rate, however, continues to trade in the 1,500 won per dollar range amid fallout from the Middle East situation.

Koo Yun-cheol, deputy prime minister and finance minister, visited NH Investment & Securities’ headquarters in Yeouido, Seoul, on the 3rd to inspect on-site sales of the RIA. Launched on the 23rd of last month, the RIA is a product that offers capital gains tax reductions when individual investors sell overseas stocks and make long-term investments in domestic equities, aiming to encourage dollar inflows into Korea. “In just about 10 days after launch, 92,000 RIA accounts have been opened,” Koo said, adding that “the system’s settlement should lead to a tangible increase in the inflow of domestic funds.”

According to the Ministry of Economy and Finance, total inflows into RIA accounts through the 2nd amounted to $320 million (about 482.1 billion won). Koo said that “since the passage of the ‘three bills for exchange-rate stability,’ there has been a move by overseas affiliates to increase dividends,” and stressed that “when the new framework reorganizing the National Pension Service’s overseas investment strategy is announced, foreign-currency supply and demand will improve noticeably.”

The won-dollar exchange rate closed daytime trading at 1,505.2 won, down 14.5 won from the previous session. It has stayed in the 1,500-won range for seven consecutive sessions since the 26th of last month.

With the exchange rate surging, the National Pension Service also appears to have moved aggressively to hedge currency risk. According to the Bank of Korea on the day, Korea’s foreign-exchange reserves stood at $423.66 billion (about 641 trillion won) at end-March, down $3.97 billion from the previous month. That marked the largest monthly decline since April last year, when reserves fell by $4.99 billion.

The decline is attributed to the National Pension Service making greater use of “FX swaps,” borrowing dollars from the Bank of Korea instead of buying dollars in the spot FX market when investing overseas.

As of end-February, Korea’s global ranking by the size of FX reserves slipped two places to 12th from 10th in January. The Bank of Korea explained that “in February, FX reserves increased by $1.7 billion month on month, but the recent surge in gold prices boosted the rankings of countries holding large amounts of gold.”

By Nam Jung-min peux@hankyung.com

By Shim Sung-mi smshim@hankyung.com