South Korea’s Pension Fund and Central Bank in Talks to Extend FX Swap Line
South Korea’s National Pension Service (NPS) and central bank are currently discussing the extension of their foreign exchange swap programme, which was set to expire in December. The news comes from two government sources with direct knowledge of the matter, indicating a positive outlook for the potential extension.
The NPS, the world’s third-largest public pension fund, and the Bank of Korea (BOK) established a foreign exchange swap line of $35 billion in April. This initiative aimed to alleviate pressure on the local currency resulting from the pension fund’s increasing investments abroad.
One of the welfare ministry officials revealed that the new amount and period for the extension are yet to be determined but are likely to align with the existing contract. This move is crucial in light of concerns among foreign exchange traders that the local currency could face additional pressure if the pension fund had to return, given its substantial demand for dollars.
The extension of the swap line holds significance for the won, which has weakened 3% against the dollar so far this month. This decline contrasts sharply with November’s performance, where the won posted its biggest monthly gain in a year. In 2023, the won has fallen 5%, marking its third consecutive yearly loss.
Amid these developments, an official at the BOK confirmed that they were discussing the extension with the NPS. The NPS also verified that they were in discussions, highlighting the significance of the ongoing dialogue between the two institutions.
Furthermore, the NPS has been increasing its overseas investments to achieve higher returns, thereby adding to the demand for dollars. This surge in demand has raised concerns about the impact on the won, with critics pointing to the NPS’s role in exacerbating declines in the local currency.
The BOK’s foreign exchange reserves experienced a $9 billion drop to the lowest level since mid-2020 during the dollar’s rally in the three months to October. Central bank data revealed that the NPS bought $8 billion worth of foreign stocks and bonds during that period, indicating a significant shift in investment patterns.
The extension of the swap line already seems to be influencing the market, as the won gained as much as 1.21% against the dollar in the onshore spot market following reports of the potential extension.
The NPS currently holds a total of 983.4 trillion won ($746.11 billion) in financial assets, with 51.6% of these assets in foreign investments. The pension fund aims to raise this ratio to 60% by 2028, underlining its commitment to expanding its international portfolio.
These discussions regarding the extension of the foreign exchange swap line between the NPS and the BOK could have significant implications for South Korea’s economy and its currency, reflecting the importance of this ongoing dialogue.
