Will the Kookmin Pension-Han Eun Forex Swap Help Stabilize Exchange Rates?

Resumption After 14 Years Since 2008
Contribution to Supply-Demand Stabilization vs Limited Impact
Need for Currency Swap with the United States

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] As the won-dollar exchange rate surpassed 1,400 won, triggering an emergency, the Bank of Korea agreed to sign a foreign exchange swap contract with the National Pension Service (NPS) in October as one of the measures to stabilize the exchange rate. This is the first time in 14 years since 2008 that the Bank of Korea and the NPS have resumed foreign exchange swaps, drawing market attention on whether it can bring a calming effect to the rapidly rising exchange rate recently.

According to the Seoul foreign exchange market on the 24th, the won-dollar exchange rate soared to 1,411.2 won during the day the previous day and closed at 1,409.3 won. The recent strong dollar phenomenon has intensified as the U.S. Federal Reserve (Fed) hinted at high-intensity tightening. On the same day, the yuan also showed weakness, with the yuan-dollar exchange rate exceeding 7.10 yuan during the day.

The Bank of Korea and the NPS announced the day before that they agreed to conduct foreign exchange swap transactions within a limit of 10 billion dollars to stabilize the exchange rate. Accordingly, when the NPS has foreign exchange demand for overseas investments, instead of buying dollars in the foreign exchange market, it will procure dollars held by the Bank of Korea for investment.

The NPS receives dollars and pays the Bank of Korea won calculated by applying the exchange rate on the transaction day, and on the maturity date, it repays the dollars and receives won calculated by applying the exchange rate considering the swap points (the difference between the forward exchange rate and the spot exchange rate) of the transaction day. The foreign exchange authorities expect that the NPS can stably secure overseas investment funds without counterparty risk, and that the demand for spot foreign exchange purchases by the NPS will ease, contributing to the stabilization of supply and demand in the foreign exchange market.

In particular, the maturity for each transaction is set at 6 or 12 months, which is longer than the maturity of foreign exchange swaps of general commercial banks, allowing the NPS to reduce transaction risks and costs. In the past, the two sides signed a currency swap in 2005, but during the 2008 foreign exchange crisis, the Bank of Korea exercised the right to early termination citing foreign exchange shortages; this time, there is a difference in that neither institution has the right to early termination.

Also, the NPS Fund Management Committee reviewed and approved a revision to the NPS fund management guidelines to raise the quarterly short-term foreign exchange fund limit from 600 million dollars to 3 billion dollars based on the average daily balance. Lee Se-ran, Director of the Pension Policy Bureau at the Ministry of Health and Welfare, said, "The increase in the short-term foreign currency fund limit will reduce unnecessary currency exchange costs and is expected to mitigate shocks to the foreign exchange market caused by large-scale overseas asset repatriation."

The foreign exchange authorities explained, "Although foreign exchange reserves will decrease during the contract period due to the transactions, the full amount will be restored at maturity, so the reduction in foreign exchange reserves is temporary."

The 'big player' pension fund managing assets exceeding 900 trillion won invests 30 billion dollars overseas annually (about 100 million dollars daily on average), but it has been criticized for fueling won weakness during the currency exchange process. The foreign exchange authorities expect that the NPS's demand for dollar purchases will decrease due to this foreign exchange swap measure, helping stabilize the won's value, as when the NPS buys spot dollars domestically for overseas securities investment, dollar purchases increase in the Seoul foreign exchange market, causing the won-dollar exchange rate to rise.

However, there is also a view that the impact of the foreign exchange swap between the two sides will be limited. The pension fund's foreign exchange market transaction ratio is only 1%, so its impact on the market is limited. A foreign exchange market official said, "It is hard to see that the foreign exchange swap with the pension fund will have a significant effect on actual exchange rate stabilization," adding, "Ultimately, exchange rate stability can be achieved through a currency swap with the United States."

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