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Foreign Reserves Fall for 5th Straight Month

Foreign Reserves Fall for 5th Straight Month


By Kim Jae-kyoung
Staff Reporter

The nation's foreign exchange reserves dropped for the fifth consecutive month in August, fanning worries over the level of national emergency funds.

According to the Bank of Korea (BOK) Tuesday, the reserves came to $243.2 billion in August, down $4.32 billion from a month ago, compared with a $10.58 billion plunge in July.

After dropping $3.76 billion in April, the reserves continued on a downward spiral ― by $2.28 billion in May and $100 million in June.

The central bank said that the fall was mainly due to foreign exchange losses in euro- and yen-denominated reserves triggered by a strengthening of the U.S. dollar.

However, market participants said that the key culprit behind the fall was the government's continued intervention in the market to stop a further weakening of the local currency.

The government and the central bank claimed the current level of foreign reserves are sufficient to protect the economy, but concerns are still lingering as the fall came with widening current account deficits and soaring foreign debts.

The nation's trade deficit surpassed $3 billion in August, the largest monthly shortfall since $3.92 billion in January, and the nation is becoming a net debtor, with its net external credit dipping to $2.7 billion in June from $13.16 billion in March

Analysts said that Korea still has the ability to protect the economy and financial market, but it is getting more vulnerable to external shocks due to the continuing fall in reserves and foreign capital outflows.

``It is true that South Korea's cushion against global financial turbulence is not sufficiently big,'' Mauro F. Guillen, director of the Lauder Institute at the Wharton School of Business, told The Korea Times.

``Korea is not alone. Several other countries have the same problem, while others have more reserves and they know what to do with them,'' he added. Guillen is an expert on the Korean economy and financial market.

The Times, a British daily, reported Monday that Korea was heading toward a full-blown currency crisis this month, as its attempt to prop up the won with the use of foreign reserves had ended in failure.

In August, Korea was the world's sixth-largest holder of foreign reserves, behind China ($1.81 trillion), Japan ($1 trillion), Russia ($595.9 billion), India ($306.2 billion) and Taiwan ($290.9 billion) But among the top 10 reserves holding countries, Korea is the only nation that saw its reserves drop this year

More concern is that the reserves are expected to shrink further as authorities are set to come back to the intervention mode.

``The threat of a disorderly decline in the currency will, we think, eventually force the authorities to intervene,'' ING Group chief economist Tim Condon said.

One day after domestic stock and currency markets took a steep dive, Seoul made it clear that it will not sit back and let the won continue sliding against the greenback.

``The government will take stern measures against excessive volatility on the financial market,'' Strategy and Finance Vice Minister Kim Dong-soo said Tuesday, adding that the currency market is now being skewed in one direction.

kjk@koreatimes.co.kr