SEOUL, October 6 (AJP) — South Korea has begun wiring funds to the United States under its $200 billion investment commitment in exchange for tariff relief, testing its ability to finance the pledge without unsettling the won.
The currency held firm Tuesday, closing 0.4 won stronger at 1,343.6 per dollar despite signs that preparations for the investment program were beginning to affect foreign-exchange reserves.
Deputy Prime Minister and Finance Minister Lee Hyoung Il told a parliamentary audit hearing that the government transferred $2.4 billion on Oct. 1 for a gas-fired power project in Texas.
A further advance payment of up to $10 billion for U.S. nuclear projects by year-end would require commercial-viability checks and completion of domestic legal procedures, he said.
The bilateral framework caps strategic investment at $20 billion annually and allows Seoul to seek adjustments to payment timing and amounts depending on foreign-exchange conditions.
The first transfer comes as the Bank of Korea reported a $1.72 billion decline in September reserves to $440.56 billion. The central bank cited lower foreign-currency deposits, valuation effects and asset entrustment to the Korea-U.S. Strategic Investment Corporation.
It was the first time the corporation’s asset entrustment had appeared among the factors affecting monthly reserves. Investment income partly offset the decline, the BOK said, without disclosing the amount. No specific size or timetable has been set for further entrustments.
The September figures exclude the Oct. 1 payment. They nevertheless show that preparations for U.S.-bound investment were already affecting Korea’s official foreign assets before the first transfer.
For the won, the immediate question is how much of that investment requires fresh dollar buying.
Exporter dollar sales, particularly by chipmakers, helped the currency withstand a firmer global dollar, foreign equity outflows and concerns over the investment pledge. Funding the initial transfer with existing foreign assets also limited the need for immediate dollar purchases in Seoul’s spot market.
Kim Jung-sik, an economics professor at Yonsei University, told AJP that future currency pressure would depend heavily on how the government raises the money.
Issuing won-denominated bonds and converting the proceeds into dollars would put more immediate depreciation pressure on the won, he said.
Borrowing dollars overseas could ease that pressure by avoiding equivalent purchases in the domestic market.
“The immediate impact would be limited, and the risk would be lower than if won-denominated bonds were used, but it could still be viewed as a potential risk later,” Kim said.
Overseas borrowing would shift part of the burden into foreign-currency liabilities that must eventually be serviced in dollars. Expectations could also move the market before any transaction takes place.
“Even expectations that the government will buy dollars in the future can put upward pressure on the exchange rate,” he said.
Citi has similarly assessed the near-term currency impact as limited, citing plans to use foreign-reserve investment income and government-guaranteed foreign-currency bonds.
Kim Jin-wook, Citi’s chief economist, said Korea’s large structural current-account surplus should provide longer-term support for the won even as the U.S. investment program generates capital outflows.
That surplus does not automatically become dollar supply in Seoul’s currency market, however. Exporters may retain their earnings abroad or reinvest them overseas.
The longer-term test is therefore how repeated funding requests will be met. Reserve income and existing foreign assets can reduce immediate dollar demand, while offshore borrowing creates future repayment obligations.
Further payments are also conditional. Beyond the commercial and legal requirements for the proposed nuclear investment, participation in an Alaska liquefied natural gas project remains under review.
The won has absorbed the first transfer. Its resilience as payments accumulate will depend on whether dollar inflows and funding arrangements can keep pace without placing sustained pressure on reserves or adding substantially to Korea’s foreign-currency debt.
AJP Takeaways
- South Korea transferred its first $2.4 billion under the U.S. investment program on Oct. 1, while September reserve data separately showed U.S.-investment-related asset entrustment for the first time.
- The won closed 0.4 won stronger at 1,343.6 per dollar as exporter dollar sales and the use of existing foreign assets limited immediate demand for dollars in Seoul’s spot market.
- Future FX pressure will depend on how subsequent investments are funded, with offshore borrowing reducing near-term spot-market demand but creating foreign-currency liabilities and future repayment needs.
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