Korean gov’t asks NPS to hedge 10% of foreign assets to prop up KRW

NPS Investment Management building

South Korea’s Ministry of Economy and Finance has formally requested the country’s largest institutional investor National Pension Service (NPS) and its competent authority Ministry of Health and Welfare to hedge 10 percent of the value of its foreign assets against a foreign currency exchange rate risk for at least six months, according to investment bank industry sources on Wednesday.

The government’s move is part of its efforts to prop up the country’s local currency won that has depreciated rapidly against the U.S. dollar in value.

NPS’s foreign investment amounts to $335.5 billion as of September 2022. If it hedges 10 percent of the value of its foreign assets, its forex hedging activities could supply about $33.6 billion worth of U.S dollars to the local forex market. Its policy shift would also trigger other public fund operators to follow suit, which could be a big relief to the local currency.

The fund has been running its foreign investment operations without hedging since 2018.

NPS’s fund operation review committee will go over the request next week for the top decision-making body’s final approval.

Because the NPS has grown to the world’s third largest pension fund with more than 900 trillion won ($68 billion) worth assets under management, it has been constantly increased investments in foreign assets to improve yields. For foreign investments, the fund buys U.S. dollars on the spot market, which has been blamed for dragging down the won’s value against the greenback.

According to a report obtained by Maeil Business Newspaper from Rep. Yoon Chang-hyun of People Power Party, NPS bought in 11.9 trillion won worth of U.S. dollars in the second quarter. Its net purchase of foreign currencies last year amounted to 31.6 trillion won, of which most were U.S. dollars.

When NPS sells dollar forwards to hedge forex exposures, banks that purchase the contracts would need to sell spot dollars in the market to balance out the buy-sell positions. And more dollars in the market would help Korean currency to gain strength.