Foreign direct investment (FDI), which helps expand the supply of dollars, was found to be sluggish. FDI refers to foreign investors establishing factories in Korea or acquiring management control for the purpose of participating in the management of Korean corporations. In this process, dollars flow in, which has the effect of pushing down the won-dollar exchange rate.
According to the Korean Statistical Information Service (KOSIS) of the National Data Office (formerly Statistics Korea) on the 21st, FDI attraction performance (based on filings) in the third quarter of this year was about $7.57 billion, down 23.1% from a year earlier. Looking at the quarterly growth rate, it fell for three straight quarters starting with the first quarter of this year (-9.2%).
The rate of decline was 9.2% in the first quarter of this year and 19.1% in the second quarter, and it grew larger in the third quarter. As a result, the cumulative FDI amount for the first to third quarters of this year stands at $20.67 billion. It shrank by about $4.51 billion (17.9%) from the same period last year.
The share of exports settled in dollars also fell. The Bank of Korea's balance of payments statistics show that the share of export proceeds settled in dollars in the second quarter of this year was 83.5% of total exports, down 0.9 percentage point (p) from a year earlier. In contrast, won settlements rose 0.9 percentage point to 3.5%, and euro settlements increased 0.1 percentage point to 6.2%.
Meanwhile, the government is rolling out various measures to increase dollar supply, including promoting foreign investment in Korea. To keep commercial banks from hoarding foreign currency, it decided to temporarily defer until June next year the supervisory measures applied to financial institutions that fail the foreign currency liquidity stress test.
The foreign currency liquidity stress test is a system that assesses whether a financial company can endure a crisis scenario in which foreign currency funds rapidly flow out. Over a set period, foreign currency inflows must exceed outflows every single day, and if this is not met, the institution must submit a liquidity augmentation plan to the supervisory authorities.