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South Korea has substantially increased its headroom for foreign exchange bond issuance as Seoul prepares to fund a $350bn investment pledge to the US under its trade deal with Washington.
The cap on forex bond issuance was raised to a record $5bn for next year under an annual budget approved by parliament late on Tuesday, from an earlier proposal of $1.4bn, according to the finance ministry.
The cap on the bonds, which are used to defend the won’s value, was $3.5bn this year.
The move appears aimed at addressing Seoul’s US investment pledge, which helped cut tariffs on South Korean car exports to 15 per cent but threatens to weaken the currency because it would entail huge dollar outflows.
Amid concerns about the currency impact, the two countries agreed to limit annual dollar outflows to $20bn. South Korea’s ruling party submitted a bill last month to implement the deal, including the creation of a bilateral investment fund and an entity to run it for up to 20 years.
In October, South Korea sold about $1.7bn in yen and dollar bonds to beef up its foreign exchange reserves, which come to $430.7bn. The sale followed its largest eurobond sale of €1.4bn in June.
The won has fallen 8 per cent against the dollar since the end of June, with the central bank blaming South Korean retail traders pouring into US equities for the sharp depreciation.
Retail investors have bought a record net $30bn of US stocks this year, nearly triple the amount for the whole of 2024. They collectively held a record $160bn in US stocks at the end of November, a fourfold increase from five years ago, according to Korea Securities Depository data.
At a press conference following an interest rate decision last week, Bank of Korea governor Rhee Chang-yong expressed concern over the “very unique Korean phenomenon”, as the won approached Won1,500 a dollar.
He questioned whether young South Koreans betting heavily on US stocks understood the risks associated with their currency exposure and whether they had proper guidance on managing forex volatility.
The financial watchdog this week said authorities would review protection measures for retail investors against forex risks.
Lee Chan-jin, governor of the Financial Supervisory Service, said agencies were not planning to regulate retail investors’ overseas stock investments but would conduct inspections on protection measures for them.
The weakening won has kept policymakers on edge. Finance minister Koo Yun-cheol last week vowed to stabilise the currency through “all possible policy options” including using the state-run pension fund, the world’s third largest.
But analysts expect the pressure on the won from outbound equity investments to ease next year.
“The combined capital outflow pressure by Korean retail investors and foreign equity investors may have passed a peak,” Citi analyst Kim Jin-wook wrote in a note this week.
