Government to Increase Corporate and Bank Foreign Currency Funds Amid Signs of Capital Outflow

Foreign Exchange Forward Position Limit Increased by 25%... Supplying Foreign Currency Funds to "Prevent Market Instability"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The government's decision on the 18th to expand banks' forward foreign exchange position limits to 25% is interpreted as a response to signs of foreign currency outflows, such as the sharp decline in the domestic stock market and the rapid rise in exchange rates due to the global pandemic of the novel coronavirus disease (COVID-19). This measure is expected to partially increase the supply of foreign currency funds. However, concerns remain that it may have limitations in preventing the outflow of foreign capital.

The Ministry of Economy and Finance, Financial Services Commission, Bank of Korea, and Financial Supervisory Service reviewed the status of domestic foreign currency liquidity at the macroeconomic financial meeting held on the 18th and decided to expand banks' forward foreign exchange position limits to 25%. Accordingly, the forward foreign exchange position limit for domestic banks will be raised from 40% to 50%, and for foreign bank branches from 200% to 250%.

The reason for this measure is that in the domestic foreign exchange swap market, there is a risk of increased volatility due to temporary concentration of demand related to foreign stock funds. The won-dollar exchange rate closed at 1,243.5 won, up 17.5 won per dollar from the previous month.

The one-year currency swap (CRS) rate also fell into negative territory starting from the 12th. This is the first time since 2009 that the CRS rate has entered negative territory. A low CRS rate means that the demand for dollars is higher compared to the won, indicating a relatively lower value of the won.

Kim Sung-wook, Director of the International Finance Bureau at the Ministry of Economy and Finance, stated, "This expansion of the forward foreign exchange position is expected to bring in about 5 to 10 billion dollars," adding, "Among foreign bank branches, many are close to their position limits."

The government’s adjustment of the forward foreign exchange position limit is the first in about three years and eight months since July 2016. Previously, as foreign capital outflows continued, the government increased the forward foreign exchange position limit for domestic banks from 30% to 40% and for foreign bank branches from 150% to 200% in July 2016. The government expects that with the expanded capacity of banks to supply foreign currency funds, there will be a partial increase in foreign currency fund supply, especially among banks with currently high forward foreign exchange positions. Currently, forward foreign exchange positions account for 10% of capital for commercial banks and 100% for foreign bank branches, respectively.

However, concerns remain that the government's expansion of forward foreign exchange positions may have limitations in preventing the outflow of funds by foreign investors. Oh Chang-seop, a researcher at Hyundai Motor Securities, said, "There may be limits to fund procurement, but we need to look at the outflow of foreign investors," adding, "In the current situation, the only way to defend against won depreciation is to raise interest rates, but since the economy is not doing well, raising interest rates is practically impossible." Meanwhile, the government plans to continue additional measures such as lending dollars to financial institutions in case market volatility increases, in addition to supplying volume.

This content was produced with the assistance of AI translation services.