Evaluation-S.Korea’s big pension fund a neighborhood drive driving gained decrease

Rate this post


By Jihoon Lee, Cynthia Kim and Yena Park

SEOUL (Reuters) – South Korea’s strenuous makes an attempt to defend a sharply weakening foreign money have run into an unstoppable home-made drive working in the other way: the nationwide pension fund.

The Nationwide Pension Service (NPS), the world’s third-largest such fund, has a hefty and rising urge for food for fairness and bond funding overseas, which it could possibly feed solely by promoting gained for international foreign money.

It made internet purchases of about $10 billion of international bonds and shares within the first 5 months of 2022, central financial institution knowledge exhibits. As a reason for gained gross sales this yr, its exercise got here on prime of a document first-half commerce deficit of $10.36 billion and the $12.53 billion that international traders had pulled from the nation’s inventory market by June.

All this downward strain has made the gained the worst performer in opposition to the U.S. greenback amongst currencies of rising Asian economies this yr. Its losses exceed 9%.

“Other than international elements, resembling excessive oil costs, for 90% of the time in latest weeks it was continued outflows by the NPS that took the gained down,” mentioned a international alternate vendor at a neighborhood financial institution.

“It isn’t worries concerning the well being of the Korean financial system that pushed the gained down. The NPS has mainly raised the greenback/gained degree with a skewed demand for {dollars} from the onshore market.”

Created in 1988, the NPS is the primary public retirement plan of Asia’s fourth-largest financial system.

It manages 919.6 trillion gained ($702.03 billion) of belongings, equal to about 40% of annual gross home product. Being so massive relative to the native financial system, it has needed to be aggressive in investing overseas, the place it has additionally seen greater returns.

Because the fund works to satisfy the retirement wants of the world’s fastest-aging inhabitants, finance and central financial institution officers don’t have any authority to direct it to maintain extra money at dwelling.

Furthermore, the fund offsets little of its demand for international foreign money with hedging, which it limits to five% of the worth of its international belongings.

Requested to touch upon the outsized function it now performs within the onshore foreign money market, the NPS mentioned it was “flexibly responding to market situations by strategically hedging international alternate dangers, since an increase within the greenback/gained price adversely impacts the return on newly purchased abroad belongings.”


South Korea’s international alternate authorities are sad because the gained, presently hovering close to a 13-year low, is heading in the right direction for its greatest annual decline in 14 years. Perched on the weaker facet of 1,300 per greenback, the foreign money is at ranges beforehand seen solely throughout financial crises.

The Financial institution of Korea made internet greenback gross sales of $8.31 billion to curb the gained’s fall within the first quarter alone.

Downward strain from NPS gained gross sales will solely develop, as a result of the fund will maintain increasing and so will international belongings’ share of its portfolio. It plans to carry 50% of its belongings overseas by 2024, up from 44% on the finish of final yr and 27% 5 years in the past.

That, on prime of the commerce deficit and Korean retail traders’ rising urge for food for international shares, may drive the gained right into a long-term downward development, officers say.

“Because the NPS persistently raises its international funding ratio, structural depreciating strain (on the gained) could observe,” a Financial institution of Korea board member mentioned throughout a Could financial coverage assembly.

A finance ministry official mentioned: “Because the NPS is one massive participant out there, it ought to assume onerous about how you can scale back its impression when it considers the timing of (greenback) buying and the way it buys.”

Even the U.S. Division of Treasury has seen the rising affect of the NPS.

In its bi-annual foreign money report, the division cited the rise of the fund’s international belongings “by round 60 billion gained in 2021,” or by 37%, predominantly pushed by valuation modifications. It was a uncommon point out of native, not worldwide, elements behind the gained’s decline.

At the very least one-quarter of the rise resulted from purchases of shares and bonds, a Reuters calculation exhibits.

($1 = 1,309.9100 gained)

(Reporting by Jihoon Lee, Cynthia Kim and Yena Park; Enhancing by Vidya Ranganathan and Bradley Perrett)


Supply hyperlink