South Korea’s Foreign Reserves Fall to Four-Year Low

By William Sim

Dec. 3 (Bloomberg) -- South Korea’s foreign-exchange reserves declined in November to the lowest level in almost four years as authorities supplied dollars to help banks struggling to obtain funds overseas.

Reserves fell to $200.5 billion, the least since January 2005, from $212.3 billion in October, the Bank of Korea said in Seoul today. That marked the eighth straight drop. The central bank and government have also used reserves to try to stem the Korean won’s 38 percent slump against the dollar this year.

Fitch Ratings last month cut its outlook for the nation’s credit rating to negative from stable, signaling that shrinking foreign-currency reserves could pose a threat to the economy’s stability. The central bank said today South Korea has enough reserves to maintain its international credibility and would be able to meet any external-payment requirements in an emergency.

“There’s no need to panic as the reserves will likely stay around $200 billion, which is about the same size as the nation’s external debt maturing within one year,” said Chun Chong Woo, an economist at Standard Chartered First Bank Korea Ltd. in Seoul.

Korea’s won fell 0.1 percent to 1,465.5 per dollar at 10:30 a.m. in Seoul, extending this year’s decline to 36 percent, Asia’s worst-performing currency. The Kospi stock index gained 0.2 percent to 1,025.25 and has dropped 46 percent in 2009.

Authorities are ready to act to “smooth” drastic moves in the won to “stabilize” the market, the finance ministry said in a statement today.

U.S. Swap

Foreign reserves are likely remain above $200 billion as the nation posts a current account surplus and uses dollars from its currency swap deal with the Federal Reserve, Vice Finance Minister Kim Dong Soo said on CBS radio today.

South Korea secured a $30 billion swap with the Fed on Oct. 30 to help ease the shortage of dollars locally. It’s also seeking to expand existing swap agreements with China and Japan, the region’s two biggest economies, as the global financial crisis persists.

Authorities have pumped funds into the financial system as the won’s plunge, coupled with the global credit-market freeze, makes it harder for the local companies to refinance or repay overseas debt.

South Korea has supplied $31.9 billion to local lenders from its foreign reserves over the past two months from a planned provision of $55 billion.

The nation ranks sixth among the world’s largest holders of foreign exchange, behind China, Japan, Russia, India and Taiwan, according to central bank data.

A stronger U.S. currency also trimmed the value of assets in euros and pounds when converted into dollars, the Bank of Korea said today.

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net.