Foreign Exchange Reserves Fall Below $410 Billion for First Time in 4 Years and 9 Months

Impact of National Pension Fund and Foreign Exchange Swaps

Last month, foreign exchange reserves fell below $410 billion. This is the lowest level in 4 years and 9 months since May 2020, with the foreign exchange swap with the National Pension Fund identified as the main factor.

According to the Bank of Korea on the 6th, foreign exchange reserves at the end of last month were $409.21015 billion, a decrease of $1.80473 billion from $411.01487 billion at the end of January. The foreign exchange reserves have decreased by $6.39363 billion in the first two months of this year. In a press briefing last December, Bank of Korea Governor Rhee Chang-yong had stated regarding concerns about declining foreign exchange reserves, "They will not fall below $410 billion."

The Bank of Korea explained, "Foreign exchange reserves decreased as the scale of foreign exchange swaps with the National Pension Fund increased." The Bank of Korea and the National Pension Fund increased the foreign exchange swap limit from $50 billion to $65 billion right after the emergency martial law at the end of last year to stabilize the foreign exchange market. When the National Pension Fund borrows foreign currency from foreign exchange reserves through foreign exchange swap transactions instead of sourcing it from the foreign exchange market or foreign currency fund market for overseas investments, it has a stabilizing effect on market exchange rates.

Foreign exchange reserves hit a bottom of $407.3106 billion in May 2020, then increased to $469.20774 billion in October 2021, but have been continuously decreasing for about three years since then.

Reporter Jinkyu Kang josep@hankyung.com