The government announced measures to improve foreign exchange supply and demand, including expanding the foreign exchange swap limit with the National Pension Service and significantly raising the forward exchange position limit for banks. This is in response to the won-dollar exchange rate surpassing 1,450 won for the first time in 15 years, thereby depreciating the value of the won. The measures aim to improve foreign currency procurement conditions and secure liquidity in the foreign exchange market.
The Ministry of Strategy and Finance, the Financial Services Commission, the Bank of Korea, and the Financial Supervisory Service (FSS) announced on the 20th that they held an emergency macroeconomic and financial meeting, presided over by Kim Beom-seok, First Vice Minister of the Ministry of Strategy and Finance, to discuss and finalize the measures for improving foreign exchange supply and demand.
The government has decided to expand the foreign exchange swap limit with the National Pension Service from $50 billion to $65 billion, an increase of $15 billion. It plans to extend the maturity of the existing swap contracts until the end of next year. The expansion of foreign exchange swaps with the National Pension Service is expected to enhance the stability of the domestic foreign exchange market even amid growing concerns about the outflow of foreign currency. A foreign exchange swap involves the foreign exchange authorities providing the dollars they hold to the National Pension Service, and the National Pension Service depositing an equivalent amount of won with the foreign exchange authorities, to be exchanged again at the initially agreed exchange rate at maturity.
The National Pension Service typically purchases dollars in the spot foreign exchange market to secure funds for overseas investments. This process can increase dollar demand and add pressure for a rise in exchange rates. However, if the foreign exchange authorities supply the necessary dollars directly to the National Pension Service, it reduces the demand for dollar purchases, as the National Pension Service does not need to buy dollars from the market. This contributes to alleviating the upward pressure on exchange rates and promotes stability in the foreign exchange market. It is also expected to have a positive impact on maintaining the profitability of the fund by avoiding excessive use of won in high exchange rate situations.
To improve foreign currency funding conditions for corporations, regulations on foreign currency loans for facility funds targeting large and small and medium enterprises (SMEs) will be eased. The plan is to manage exchange rate risk and support corporations' investment activities through this measure. A government official explained that the initiative will be limited to export companies with lower foreign exchange risk burden, taking into account the borrowers' capacity to bear such risks.
The government will simplify the issuance procedures for bonds listed on the Luxembourg Stock Exchange (LuxSE) to assist domestic corporations in securing overseas funding. This plan intends to enable corporations to raise funds more efficiently abroad.
The forward exchange position limits for domestic and foreign banks will also be adjusted upward. The limit for domestic banks will be increased from 50% to 75% of their capital, while the limit for foreign bank branches will be raised from 250% to 375%. The forward exchange position limit refers to the maximum foreign exchange position that banks can hold. The government believes that these measures will enhance foreign exchange market liquidity and strengthen crisis response capabilities.
The strengthened regulations on foreign currency liquidity stress tests will be deferred. The Financial Supervisory Service (FSS) has been conducting stress tests since June 2011 to assess the surplus and shortage of foreign currency funds of each financial institution under crisis scenarios.
From June this year, the government introduced enhanced stress tests with improved precision, adding assessments such as survival period evaluation. However, it decided to postpone the implementation of supervisory actions for financial institutions that do not meet the enhanced standards from the end of this year to June next year. The government expects that this postponement will give financial institutions ample time to prepare for the new standards and maintain stability in the foreign exchange market.
A government official noted, "We will pursue a phased institutional expansion while closely monitoring the implementation effects of these measures, the country's credit rating, and foreign exchange market conditions."