Foreign Exchange Reserves Decrease for 2 Consecutive Months in Currency Defense... $430 Million Drop

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Last month, foreign exchange reserves decreased for the second consecutive month. This was influenced by a reduction in foreign currency funds due to a $35 billion foreign exchange swap with the National Pension Service to defend the exchange rate, as well as a decrease in foreign currency deposits by financial institutions.

According to the "End of May Foreign Exchange Reserves" announced by the Bank of Korea on the 5th, Korea's foreign exchange reserves at the end of last month stood at $412.83 billion, down $430 million from the end of the previous month. The previous lowest level of foreign exchange reserves was in June 2020 ($410.75 billion).

Korea's foreign exchange reserves had decreased for two consecutive months until February due to the strong US dollar but increased by $3.51 billion in March due to an increase in foreign currency deposits by financial institutions. In April, the reserves decreased by $6 billion as the foreign exchange authorities took market stabilization measures amid soaring exchange rates, marking a second consecutive month of decline.

Kim Young-woong, head of the Foreign Exchange Accounting Team at the Bank of Korea, explained, "Although the operational income from foreign currency assets such as stocks and bonds held by the Bank of Korea increased, the temporary effect of the foreign exchange swap with the National Pension Service and the decrease in foreign currency deposits by financial institutions contributed to the decline." He added, "Both factors contributed evenly to the decrease in foreign exchange reserves."

Typically, at the end of March, financial institutions deposit foreign currency to comply with the Bank for International Settlements (BIS) capital adequacy ratio. Around April to May, when this effect expires, foreign exchange reserves tend to decrease.

Also, as the exchange rate touched 1,400 won intraday in April, the foreign exchange authorities and the National Pension Service signed a $35 billion foreign exchange swap agreement to stabilize the foreign exchange market. In such cases, foreign exchange reserves temporarily decrease, and when the swap period expires and dollars are recovered, the reserves increase again.

By asset type, government bonds, corporate bonds, and other securities accounted for the largest portion at $370.41 billion (89.7%). Other components included deposits of $18.5 billion (4.5%), Special Drawing Rights (SDR) at the International Monetary Fund (IMF) of $14.75 billion (3.6%), gold at $4.79 billion (1.2%), and IMF positions at $4.38 billion (1.1%).

As of the end of April, Korea maintained its 9th place in the world in terms of foreign exchange reserves. China ranked first with $3.2008 trillion, followed by Japan with $1.279 trillion, Switzerland with $878.7 billion, and India with $640.2 billion.

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