Seoul: South Korea's foreign currency authorities have initiated discussions to extend their currency-swap arrangement with the state pension operator, according to the finance ministry. This move comes as the Korean won continues to weaken against the U.S. dollar, prompting the Ministry of Economy and Finance, the Bank of Korea (BOK), the National Pension Service (NPS), and the Ministry of Health and Welfare, which oversees the pension fund, to form a joint consultation body last month.
According to Yonhap News Agency, during the latest meeting of this four-way body held on Sunday, detailed discussions commenced on extending the currency-swap contract, set to expire at the end of this year. Under the agreement, the NPS is allowed to borrow up to US$65 billion from the BOK's foreign reserves in exchange for its local-currency holdings. The currency swap deal, initially established in September 2022 with a limit of $10 billion, has seen successive expansions, reaching $50 billion in June 2024 and $65 billion in December 2024.
Officials at Sunday's meeting discussed implementing measures to address imbalances in the FX market's supply and demand structure. The government plans to regularly review FX transactions and overseas investment activities by exporters and is considering policy support as necessary. Other measures include inspections of investor-protection practices related to overseas investment products, specifically targeting securities firms and other financial institutions.
Market observers noted that the formation of the consultative body might lead to a review of the NPS' strategic currency-hedging program, especially amid speculations about the government's potential use of the NPS, which holds a growing overseas portfolio, to defend the depreciating local currency. The NPS, recognized as the world's third-largest pension fund, is authorized to hedge up to 10 percent of its overseas assets when the FX rate surpasses its long-term average for a certain period.
Finance Minister Koo Yun-cheol has emphasized that these discussions are not intended as a temporary measure to mobilize the pension fund in response to the won's depreciation.