Seoul proposes to triple sovereign debt issue in USD to up intervention ammunition

2022.09.28 09:55:30 | 2022.09.28 09:57:20

[Graphics by Song Ji-yoon]이미지 확대

[Graphics by Song Ji-yoon]

The South Korean government has proposed to up the ceiling in sovereign debt issue in U.S. dollar denomination next year to $3 billion, tripled from this year, to build up ammunitions for intervention against entrenched strengthening in the greenback that has been pushing the Korean won to crisis-level lows.

The Ministry of Finance and Economy included the proposal to raise the annual ceiling for foreign exchange stabilization bonds to $3 billion in the outline for 2023 budget after it recently vowed to back shipbuilders in dollar purchases for forward contracts and more eagerly employ the riches in the foreign exchange coffers to prop up the local currency.

FX reserves are comprised of foreign currencies piled at the central bank and foreign exchange stabilization funds managed by the finance ministry.

The ceiling in sovereign debt issue in foreign currency is currently at $1 billion.

“The government would likely consider the issue scope depending on the forex situation next year,” observed an investment banker.

The government since Friday has been announcing multiple measures to help boost the Korean won against the strong U.S. dollar that has weakened the won to lows since the wake of global financial crisis in 2008 and Asian liquidity crisis in 1997.

Finance Minister Choo Kyung-ho will sponsor a government IR event in New York next month after he visits Washington D.C. for the Annual Meetings of IMF/WB held in Washington D.C. to raise foreign confidence in the Korean economy by citing differences in the fundamentals since last crises.

At the same time, Seoul has been pitching hard to have the Korean sovereign bond trade on the flagship World Government Bond Index (WGBI) managed by Financial Times Stock Exchange (FTSE),

According to the Ministry of Economy and Finance, the FTSE Russell Group will announce WGBI watch list on Sept. 30. WGBI is known as a sovereign bond club of advanced countries as it measures the performance of sovereign bonds of 23 countries including the United States, Japan, and the United Kingdom. The index is tracked by $2.5 trillion funds.

FTSE Russell Group announces a watch list in March and September every year after evaluating investment environment for foreigners. Once included in the watch list, FTSE Russell Group will review actual system operations and make final decision in its annual review in September next year.

Korea being on watch list this week will allow it to pass the first gate to join the WGBI that will be decided next year. Market watchers noted that simply being on the watch list will help improve investor sentiment and stabilize won.

Korea Institute of Finance estimates up to 60 trillion won in funds can flow into the Korean market if Korean sovereign bonds join the index. Hi Investment & Securities projected Korea debt could be weighted at 2.3 percent of advanced bond index, enabling $58 billion to $70 billion in funds to funnel into the country across 18 months.

Foreigners held 73.75 billion won worth Korean government and corporate bonds as of the end of last year, raising that much of a danger on the local financial market if they choose to withdraw funds out of Korea to chase higher yields in the U.S. or other advanced economies moving faster with rate increases.

By Chun Gyung-woon, Kim Jung-hwan, and Lee Eun-joo

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