Analysis-S.Korea’s huge pension fund, a local force driving lower wins According to Reuters

© Reuters. FILE PHOTO: A South Korean won bill is seen in this illustration photo May 31, 2017. REUTERS / Thomas White / Illustration / File photo

By Jihoon Lee, Cynthia Kim and Yena Park

SEOUL (Reuters) – South Korea’s attempts to defend its faltering currency have encountered an unstoppable force in the country that is working in the opposite direction: the national pension fund.

The National Pension Service (NPS), the world’s third largest fund, has a growing and growing need to invest in stocks and bonds abroad, which it can earn just by selling won get foreign currency.

It made a net purchase of about $10 billion in foreign bonds and stocks in the first five months of 2022, central bank data showed. As a driver of won sales this year, its performance was attributed to a record first-half trade deficit of $10.36 billion and $12.53 billion that foreign investors withdrew. from the country’s stock market in June.

All this downward pressure has made the won the worst currency against the US dollar among emerging Asian currencies this year. Its losses exceeded 9%.

“Apart from global factors, such as high oil prices, 90% of the time in recent weeks, cash flows continue as the NPS continues to drive the won down,” said a foreign exchange agent at a bank. local said.

“Not having to worry about the health of the Korean economy pushed the won down. NPS basically raised the dollar/won level with the demand for dollars from the domestic market skewed”

Established in 1988, NPS is the public pension plan of Asia’s fourth largest economy.

It manages 919.6 trillion won ($702.03 billion) of assets, or about 40% of annual gross domestic product. Because it is so large compared to the local economy, it has had to actively invest abroad, where it also reaps higher returns.

As the fund works to meet the retirement needs of the world’s fastest aging population, financial officials and central bankers have no authority to direct the fund to keep more money at home.

Furthermore, the fund covers very little of its foreign currency needs with hedging, which is capped at 5% of the value of its foreign assets.

When asked to comment on the overwhelming role it currently plays in the domestic currency market, NPS said it has “flexibly reacted to market conditions by hedging foreign exchange risk in an aggressive manner.” strategy, as an increase in the dollar/won exchange rate adversely affects profits from new purchases of overseas assets.”


South Korea’s foreign exchange regulators are not pleased that the won, currently hovering near a 13-year low, is of course its biggest annual drop in 14 years. Trading at a weaker $1,300 per dollar, the coin is at levels previously only seen during economic crises.

The Bank of Korea made net sales of $8.31 billion to limit the drop in the won in the first quarter alone.

The downward pressure on sales from NPS will only increase, as the fund will continue to expand and the share of foreign assets in the fund’s portfolio will also increase. It plans to hold 50% of its assets abroad by 2024, up from 44% at the end of last year and 27% five years ago.

In addition to the trade deficit and South Korean retail investors’ growing appetite for foreign stocks, officials said, could tip the won into a long-term downtrend.

“As NPS continuously increases the rate of foreign investment, downward pressure on structural prices (for the won) may occur,” a Bank of Korea board member said at a key meeting. monetary policy in May.

A finance ministry official said: “Since NPS is one of the big players in the market, NPS should think twice about how to reduce its impact considering when to buy (dollars) and how it buys. .”

Even the US Treasury Department has noticed the growing influence of NPS.

In its biennial currency report, the ministry cited an increase in the fund’s foreign assets “about 60 billion won by 2021”, or 37%, mainly due to a change in valuation. It was a rare mention of the domestic, not international, factors behind the won’s drop.

According to Reuters calculations, at least a quarter of the increase was due to buying stocks and bonds.

(1 dollar = 1,309,9100 won)

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