Following the 12·3 martial law situation, annual forecasts for the won-dollar exchange rate by investment banks (IB) have been repeatedly adjusted upward, raising concerns about a shortage of the 'foreign currency budget.' The foreign currency budget pertains to the budget required in foreign currencies such as the dollar and is primarily related to sectors like defense projects and diplomacy. A specific 'allocation standard exchange rate' is set to convert the budget to the won amount, determining the total budget aggregates. If the actual exchange rate rises above the standard exchange rate, the budget may become insufficient.
According to the Ministry of Strategy and Finance, the scale of the foreign currency budget included in this year's budget plan is $6.114 billion. At this time, the standard allocation exchange rate is 1,380 won (won-dollar exchange rate). This means that approximately 8.4373 trillion won is expected to be necessary. The proportion of the foreign currency budget compared to total fiscal expenditure this year is 1.2%.
The foreign currency budget is related to a variety of projects across several ministries, from the Defense Acquisition Program Administration, which purchases weapons, to the Ministry of Foreign Affairs, which conducts operations abroad, purchases foreign equipment, and engages in official development assistance (ODA).
The problem is that there is a significant difference between the exchange rate forecast for 2025 made during the budget allocation and the current exchange rate forecast. According to Bloomberg, as of September, the average forecast for this year's won-dollar exchange rate by major forecasting institutions was 1,294 won. This was based on a scenario where the exchange rates would gradually lower over time: 1,306 won in the first quarter, 1,296 won in the second quarter, 1,287 won in the third quarter, and 1,287 won in the fourth quarter.
However, this perspective has drastically changed since the 12·3 martial law situation. According to the Korea Institute for International Economic Policy (KIEP), the average exchange rate predicted by six overseas investment banks, including JP Morgan, is expected to rise to 1,435 won in the first quarter, 1,440 won in the second quarter, and 1,445 won in the third quarter. In particular, Nouriel Roubini has predicted that the exchange rate in the second and third quarters could soar to 1,500 won.
If the won-dollar exchange rate increases by 10 won compared to this year's allocation standard exchange rate, there will be a shortfall of 61.1 billion won. Assuming the annual average exchange rate reaches 1,440 won, approximately 367 billion won will be lacking.
The government explains that since the scale of the foreign currency budget is set significantly high using the 'foreign currency exchange system of the Foreign Exchange Stabilization Fund,' it is unlikely that budget execution will face disruptions due to exchange rate losses. This system converts foreign currency held by the Foreign Exchange Stabilization Fund to the standard allocation exchange rate instead of exchanging it through commercial banks, when ministries need to convert their budgets to foreign currency. A Ministry of Strategy and Finance official noted, "This system accounts for 70% (5.52 trillion won) of the entire foreign currency budget" and stated, "It is unlikely to become a major problem."
However, this too is not without its side effects. As the Foreign Exchange Stabilization Fund bears the risk of exchange rate fluctuations, the more actively this system is utilized, the more the foreign currency resources within the fund decrease while won resources increase. When the won-dollar exchange rate surges like now, the necessary 'foreign currency resources' for stabilizing the exchange rate get partially depleted under the guise of budget responses.
If the won-dollar exchange rate rises significantly more than expected, causing a disruption to the remaining 30% of the foreign currency budget that directly bears the risk of exchange rate fluctuations, measures such as adjusting project plans to save on expenditures or utilizing surplus budgets from individual ministries need to be taken. In the worst-case scenario, considering the allocation of contingency funds may also be necessary.