 |
| A Hana Bank employee arranges bundles of U.S. $100 bills at the bank's headquarters in downtown Seoul, in this April photo. Newsis |
By Lee Yeon-woo
As the gap between the key interest rates of Korea and U.S. has expanded to a historic high, market watchers are debating whether the country holds enough foreign exchange reserves to weather external shocks.
Concern has been raised especially as the country experienced the largest drop in its foreign exchange reserves last year to $423.16 billion from $463.12 billion.
Since the 1997 Asian financial crisis which subsequently made the country seek financial assistance from the International Monetary Fund (IMF), Korea has been increasing its foreign exchange reserves steadily. The amount surpassed $100 billion in 2001, $300 billion in 2011 and $400 billion in 2018.
However, last year saw an unprecedented decrease in reserves as the financial authorities decided to sell dollars amid the soaring won-dollar exchange rate on the global strengthening of the U.S. currency.
Many market watchers have questioned whether Korea's foreign exchange reserves are sufficient to deal with external shocks, given the current economic volatility. The interest gap between Korea and the U.S., which reached a historic high of 1.75 percentage points last week, adds to woes.
They point out that Korea has failed to meet the IMF's standard for assessing reserve adequacy (ARA) for the last three years. Korea's ARA stands at 97 percent, while the fund deems a range of 100 to 150 percent to be appropriate.
However, Korean financial authorities have firmly denied these worries, stating that ARA is just one of several evaluation standards used to determine reserve adequacy.
"Korea's foreign exchange reserves are ranked ninth globally, so these standards may not be entirely applicable," Bank of Korea Governor Rhee Chang-yong said during a press conference last August.
Krishna Srinivasan director of the IMF's Asia and Pacific Department, echoed this sentiment, stating that Korea's foreign exchange reserves are "enough." Speaking at a press meeting during the Asian Development Bank's 56th annual meeting last week, Srinivasan emphasized that the recommendations are not necessarily applicable to Korea, as they are typically "targeted towards emerging countries."
Korean Finance Minister Choo Kyung-ho also dispelled worries last October, stating that "there is no such thing as an appropriate level of reserves since they are used in various situations and circumstances."
While it is difficult to determine whether Korea's current level of foreign exchange reserves is insufficient, analysts agree that there is no room for complacency since the appropriate level of reserves can vary depending on a country's individual economic situation and basic economic strength.
Sung Tae-yoon, an economics professor from Yonsei University, commented that it's important to pay close attention to "changes in the level of foreign exchange reserves," considering the pressure on the value of the Korean won and weak performances of the country's current account balances.
Korea's foreign exchange reserves have been on an upward trend again this year, amid the relative weakening of the U.S. dollar. As of April, Korea's foreign exchange reserves stood at $426.68 billion.
![[INTERVIEW] Virtual K-pop group MAVE: is more than just pretty pixels](https://img.koreatimes.co.kr/upload/thumbnailV2/bcc387606cf7451c94f51a5978960c9f.jpg/dims/resize/178/optimize)
![[INTERVIEW] 'Cobweb' director questions meaning of cinema](https://img.koreatimes.co.kr/upload/thumbnailV2/a029c9ea411f4aef94c6310f6a7c3c54.jpg/dims/resize/178/optimize)
![[INTERVIEW] Seoul's increased art market momentum brings Sotheby's back to Korea](https://img.koreatimes.co.kr/upload/thumbnailV2/3439cc1e2d744b85ab81fdcf6f045ba5.jpg/dims/resize/178/optimize)
