Invest2 publishers2 min readPublished
Korea pays its first $2.4 billion U.S. investment out of foreign exchange reserves
South Korea's foreign reserves fell $1.72 billion in September to $440.56 billion after the government paid $2.4 billion of reserve assets into its first U.S. project. The payment is about half a percent of reserves, and it makes the U.S. investment program a line item in Korea's monthly reserve data.
The Investor · Invest desk
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What happened
- August's record monthly gain of $14.33 billion had lifted reserves to $442.28 billion, their highest level since May 2022.
- The Bank of Korea and the Foreign Exchange Equalization Fund entrusted the money to the Korea-U.S. Strategic Investment Corp., which passed it to a U.S. vehicle funding the Encinal gas plant in Texas.
- A Bank of Korea official named three causes: lower foreign currency deposits held by financial institutions, the entrustment, and a weaker dollar value of non-dollar assets.
- The Bank of Korea also plans to resume buying physical gold for the first time in 13 years, possibly starting at the end of this year.
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Why it matters
- cost A single remittance the size of Encinal is 2.5 times the reserve gains of June and July combined, so slow months of ordinary growth cannot cover a transfer.
- exposure State foreign currency is now tied to construction of one Texas gas plant, held through a U.S. special-purpose vehicle outside the reserve count.
- contradiction Yonhap's account of the same release attributes the fall only to lower deposits at financial institutions, so the U.S. payment's share of September's drop is an inference the central bank did not quantify.
The category lines do not add up to the transfer. Securities fell $1.05 billion to $386.03 billion [5], deposits fell $350 million to $29.95 billion [6] and special drawing rights fell $290 million [19], a combined $1.69 billion [14]. That is less than the $2.4 billion paid for the U.S. project [9]. If the whole remittance left the reserve count, everything else in September added about $680 million on net [21]. That happened in a month when a stronger dollar cut the dollar value of euro, yen and pound holdings [11].
Those two losses behave differently. The currency loss is a mark on assets Korea still holds, and it reverses if the dollar gives back its September gain [11]. The $2.4 billion is a payment out [9], and no move in the exchange rate brings it back into the reserve count.
There are three ways the program could look a year from now. Later projects could go through the same joint entrustment by the central bank and the Foreign Exchange Equalization Fund [9], and each would show up as a subtraction like September's. They could be paid from some other pool, in which case the reserve line would barely move. Or investment income and currency swings could keep swamping transfers of this size, as they did in August [3].
I think the first case is the likely one, because the first project already used it. Even so, the drain is small at this size. It would take about six remittances the size of Encinal to give back August's gain [17], and reserves still sit $12.61 billion above their end-July level [18]. The sources do not give the program's total size or a schedule for later payments, so a lasting drain on the buffer is a conditional case for now. The view that the drain is small fails if the next several monthly releases show entrustments large or frequent enough to hold reserves down through months of ordinary gains.
The two reports of the release disagree on one line. Seoul Economic Daily puts SDR holdings at $15.48 billion [19] and Yonhap at $15.77 billion [20], though both have them down $290 million. Gold was unchanged at $4.79 billion [7]. The central bank also stopped publishing country rankings of reserves last month, a practice it had kept since 2000, and said the figures can still be checked through its ECOS database [13].
What to watch
- The October reserve release, and whether a Bank of Korea official again lists entrustment to the Korea-U.S. Strategic Investment Corp. among the causes.
- Any disclosure of the U.S. program's total size, the second project, or a schedule for later remittances.