Published : 2013-09-04 20:31
Updated : 2013-09-04 20:31
Recent data from the central bank showed Korea’s foreign reserves stood at an all-time high of $329.7 billion at the end of last month. The record amount, which is about 1.3 times the size recommended by the International Monetary Fund, has fueled a debate over the optimal level of foreign reserves.
Some cautious experts argue that the current level may not be enough to cope with a possible steep capital outflow prompted by external impacts, proposing to increase the sum to at least $400 billion. Other pundits side with the view held by government officials that Korea’s foreign reserve holdings are sufficient to get through market volatilities.
There are no internationally accepted standards for the level of foreign reserves that a country should keep to protect itself from fluctuations in currency markets. The IMF customarily suggests the target for each member state, which is then requested to hold about 100-150 percent of the suggested amount.
The opposing sides of the debate seem to have enough ground to back up their case. Experts who see the current level, the seventh-highest in the world, as appropriate note that increasing it further would only incur unnecessary costs, expanding national debt and harming fiscal health.
A more cautious view is that though Korea’s foreign reserve holdings have increased significantly over the past years, they are still not enough to cope with a rapid outflow of foreign capital.
Since the 2008 global financial crisis, the additional capital inflow into Korea’s stock and bond markets has reached about $300 billion on the back of quantitative easing measures in major economies, which are now moving to scale them down. Korea has seen more capital inflow than its three neighbors ― China, Japan and Taiwan ― in recent years, but its foreign reserves have increased at a slower pace than their holdings. Its foreign reserves increased 25 percent over the five years from 2007, compared to 118 percent for China with $3.34 trillion, 30 percent for Japan with $1.26 trillion and 48 percent for Taiwan with $408.4 billion.
Korea has lowered the ratio of short-term external debts to foreign reserves from 50 percent to 39 percent, but the figure still remains higher than those for other Asian economies.
Proponents for further increasing foreign reserves note it would bring more benefits than costs by heightening the possibility of preventing a financial crisis and helping expand exports through the lower value of the Korean currency.
The rise in foreign reserve holdings alone may not deter external volatilities from affecting the economy, but it will certainly help lessen the impact and stabilize the market psychology. Over the long term, more comprehensive efforts will be needed to establish a stronger foreign exchange system.