South Korea to Reduce FX Stabilization Fund to Record Low in 2025.

 (Bloomberg) — South Korea will reduce the size of its foreign exchange stabilization fund by over 30% next year, marking the largest cut in its history, though the government maintains that this will still be adequate to support the won.

This decision comes as the South Korean currency has declined 3.7% against the US dollar so far this year, making it the second weakest performer in Asia, following the Taiwanese dollar.

Hee Jae Kim, director of the foreign exchange market division at South Korea’s finance ministry, stated in a phone interview with Bloomberg News on Monday, “The amount of foreign exchange reserves is sufficient, and the size of the fund’s assets is also adequate to respond to the foreign exchange market.”

He added, “A reduction in the size of the fund does not necessarily indicate a decrease in its capacity to address foreign exchange market needs.”

The government plans to decrease the foreign exchange stabilization fund from 205.1 trillion won ($151.1 billion) this year to 140.3 trillion won ($104.6 billion) in 2025. This cut represents the largest reduction since the fund was established in 1967 to mitigate excessive volatility in the won.

Min Gyeong-won, an economist at Woori Bank in Seoul, commented, “The impact of the reduction would be minimal, as the foreign exchange reserves are currently more than three times the short-term external debt of South Korea. If the won depreciates, corporations would liquidate dollars from their foreign exchange deposits. Conversely, if the currency appreciates, demand from individual investors for dollars for overseas stock investments would likely increase.”

The fluctuations of the won have caused concern among South Korean authorities this year. In April, the finance ministry’s international finance bureau and Oh Kum-hwa, director general of the Bank of Korea’s international department, issued a joint statement indicating they were closely monitoring exchange rate movements after the currency fell to 1,400 per dollar—the lowest level since 2022.

Since July, the government has extended the currency's trading hours as part of its efforts to include its stocks and bonds in more global indexes, although this could lead to increased volatility during periods of lower liquidity.

Earlier reports from the Korea Economic Daily indicated the government's plans to reduce the fund’s size.

(Adds chart, quote from Woori in sixth paragraph.)