Korea's Forex Reserves Seen Hitting Record High

Korea's foreign exchange reserves are swelling rapidly due to massive current account surpluses and other factors. As of the end of June, the nation's foreign exchange reserves stood at US$231.73 billion. The volume could hit $270 billion by the end of the year "on the Bank of Korea's absorption of dollar liquidity amid stable currency markets and rising investment gains," an official with the Ministry of Strategy and Finance said.

The Korean government expects a current account surplus of between $10 billion to $15 billion in the second half of this year, on top of a record $21.75 billion surplus from the first half. Depending on market conditions, the government plans to reabsorb more than $5 billion it has loaned to exporters and banks. During the second half it plans to issue $3 billion worth of forex stabilization bonds, while the increased reserves have generated proceeds through investments.

Korea's foreign exchange reserves hit a record high $264.25 billion in March of last year, but shrank to $200.5 billion by the end of November as the government provided dollars to Korean banks amid the global financial crisis. But the reserves rose by more than $30 billion in the first half alone as banks and state-run companies were able to obtain loans from overseas and the economy posted current account surpluses.

There are growing calls from within the Finance Ministry and from financial experts for Korea to boost the reserves to at least $300 billion as a safeguard against external risks. But the government's approach is to increase the volume steadily rather than attempt a quick but conspicuous boost, so it is unlikely that figure will be reached by the end of the year.

"It would be better to have a larger foreign exchange reserve in order to better deal with economic crises, but attempts to buy dollars to artificially boost the reserve volume could lead to accusations of currency manipulation, while excess won in the markets could stoke inflation," a high-ranking ministry official said.

Kwon Soon-woo, chief macroeconomist at Samsung Economic Research Institute, warned that $300 billion may not be enough if a financial crisis erupts. "An effective measure would be to boost the reserve volume while strengthening international cooperation through financial pacts such as currency swap deals," he said.