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The nation's foreign reserves dropped for the fourth straight month in July, posting US$247.5 billion, down from $258.1 billion in June, the central bank said on Monday. The foreign reserves fell $14.7 billion, or 5.6 percent, during the first seven months of this year.
It was the biggest monthly decline since the central bank started compiling foreign reserves figures in 1971. The previous record was made in November 1998 when the country's foreign reserves fell by US$6.1 billion.
July’s drop was mainly attributable to the financial authorities' intervention to prop up the local currency against the U.S. dollar, a move to curb spiraling inflation cased by higher energy import costs.
"Foreign reserves fell in July mainly because the government and the central bank pledged on July 7 to work together to stem the won's loss against the U.S. dollar," the Bank of Korea said in a statement. "A stronger U.S. dollar also brought down the dollar value of assets in other currencies like the euro," it said.
Foreign reserves consist of securities and deposits denominated in overseas currencies along with International Monetary Fund reserve positions, special drawing rights and gold bullion. The Bank of Korea had 64.6 percent of its foreign reserves in U.S. dollar assets as of the end of last year.
The government and the central bank were believed to have dumped more than $15 billion in the local currency market to bolster the won since they vowed in early July to use some of the nation's foreign reserves to lift the won.
The government has also eased restrictions on foreign currency borrowing by state-run companies in a bid to increase dollar inflows into the local currency market. The series of steps raised the won's value by 3.2 percent in July.
The measures for the stronger local currency are aimed at cushioning the impact of soaring energy import costs on its economy. South Korea, the world's fifth-largest oil importer and second-biggest gas buyer, is vulnerable to price rises because it buys almost all of its energy and raw materials needs from overseas.
Higher import costs have led to a rapid rise in inflation. The country's inflation accelerated to 5.9 percent year-on-year in July, the fastest past in a decade, squeezing household incomes and corporate profits.
The annual gain in July surpassed the central bank 's target range of 2.5 to 3.5 percent. The country's inflation jumped to 5.5 percent in June. The National Statistical Office said high oil and other commodities prices translated into high consumer costs, which seemed to be driving up overall inflation.
Financial policymakers have opted for the stronger local currency to fight inflation because a strong won against the greenback makes import prices cheaper.
They dumped billions of U.S. dollars in the local currency market to support the won at the risk of slowing exports, the country's main growth engine and accounts for more than 60 percent of the gross domestic product.
But economists say the losses in the foreign reserves could be a warning signal that South Korea could turn to a net debtor country, which could dent its international profile.
As of the end of March, South Korea's combined debts stood at US$412.5 billion, while its credits amounted to US$427.4 billion. Its net international credit more than halved to US$14.9 billion, the smallest since September 2000.
Experts worry that a steady rise in short-term debts and an expected current account shortfall this year, the first in 11 years, will accelerate the move toward net debtor status for South Korea.
"South Korea should maintain a quite significant size of foreign currency reserves as a way to bolster its credit standings and avoid any possible financial turmoil," said Shin Min-young, an analyst at the private LG Economic Research Institute.
South Koreans have bitter memories of the foreign reserves wasted in a failed attempt to defend the local currency, which led to the country's financial crisis in 1997 when its foreign reserves stood at US$8.87 billion. South Korea was compelled to go to the International Monetary Fund in December 1997 for a record $58 billion bailout to avoid a national debt default.
The dwindling foreign reserves come at a time when more and more foreign investors are exiting South Korea. Foreign ownership of South Korean stocks fell below 30 percent for the first time in eight years, down from 44 percent in 2004, following a month-long selling spree by foreigners, the stock market operator said on Monday.
Still worse, foreign direct investment in South Korea posted a net outflow in the first half of the year for the first time since 1980 when the country began to compile related data. The country posted net outflows of US$890 million in the first six months of the year, according to the Bank of Korea.
