South Korea’s foreign exchange reserve adequacy ratio is lower than India and Indonesia, which are rattled by signs of a financial crisis
August 26, 2013 Leave a comment
S. Korea lags behind India, Indonesia in FX reserve adequacy ratio
2013.08.26
Based on economic data, South Korea’s foreign exchange reserve adequacy ratio is lower than India and Indonesia, which are rattled by signs of a financial crisis. According to data from the Bank of Korea, Ministry of Strategy and Finance and International Monetary Fund (IMF), Korea held $329.7 billion in foreign exchange reserve as of late July this year, equivalent to 130 percent of the base level set forth by the International Monetary Fund (IMF). Taking into account short-term external debt, the outstanding balance of investment in securities and others by foreigners, M2 money supply and exports, the IMF sets out a base level of foreign exchange reserves by country and suggests a country hold 100 to 150 percent of such level. Korea has maintained about 130 percent of such level for the recent years. Indonesia posted a reserve adequacy ratio of 165 percent and India that of 180 percent in late 2011, according to the IMF’s estimates for Asian emerging countries. Many of the countries’ ratios exceeded that of Korea, as the ratio of the Philippines came to 344 percent and that of Thailand 317 percent. Malaysia’s ratio stood at 137 percent as of late 2012. Korea runs a current account surplus and boasts a fiscal discipline, yet the country suffers a frequent inflow and outflow of foreign investment funds, as well as risk arising from North Korea. As a result, Korea cannot afford to be secure about foreign currency reserves even as it meets the IMF’s guideline. This has bolstered the voice that Korea needs to increase foreign currency reserves in case major economies wind down quantitative easing.
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