By Lee Min-hyung
The Bank of Korea (BOK) must increase the portion of cash in its foreign exchange (FX) reserves amid widening economic uncertainties over the third wave of the coronavirus here, experts urged Wednesday.
This is a preemptive step to take a stable control of FX reserves at this period of growing volatilities in the global financial market, they argued.
As of the end of November, Korea's FX reserves came in at $436.38 billion, the largest in history. According to the central bank, this is the world's ninth-largest figure.
But cash accounted for only 6.7 percent of the total, a signal that the nation remains vulnerable to a possible FX liquidity crisis in the medium to long term, economists said.
"Korea needs to increase the portion of cash to 30 percent out of the total FX reserves," Sejong University economist Kim Dae-jong said. Even if the total amount of the reserves also matters, increasing the portion of liquid assets is much more important at times of financial crisis, according to him.
According to the central bank, securities ― such as U.S. treasury bonds ― accounted for 90.4 percent from the total FX reserves.
"Argentina experiences repeated FX crises, and Korea is also no stranger to currency crisis," he said. "The government is urged to make thorough preparations against a possibly looming financial crisis amid the unceasing signs of the virus spread."
Korea suffered from the 1997 Asian financial crisis and was rescued by the International Monetary Fund, but the country has not piled up enough FX reserves since then, according to him.
The economist also said the amount of Korea's FX reserves should be expanded in line with the nation's economy. Korea's FX reserves-to-GDP ratio is less than 30 percent, and this is too small when compared with other countries ― such as Hong Kong, Switzerland or Taiwan ― whose FX reserves far exceed that of Korea, even if Korea's GDP is larger.
"Given Korea's economic power, my view is that the nation needs to scale up FX reserves until the FX reserves-to-GDP ratio tops 80 percent," Kim said.
Yonsei University economist Sung Tae-yoon also underlined the need for the government to take more stable control of FX reserves from a longer-term perspective.
"Generally speaking, it is desirable for the government to ensure liquidity in FX reserves," he said.
The U.S. dollar is considered a safe asset, but its liquid nature is much more important when the central bank controls FX reserves, according to him.
But as the central bank has recently renewed its currency swap deal with the U.S., it is hard to say that Korea is faced with an urgent, near-term liquidity crisis, the economist said.
Last week, Korea and the U.S. renewed their $60 billion currency swap agreement for another six months to the end of September 2021.
"But it is best for the government to control FX reserves in a more stable manner by leaving open the possibility of the two countries failing to renew the agreement next year," he said.
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