Korea mulls issuing FX stabilization bonds for first time in 21 years

[Image source: Gettyimagesbank]

The South Korean government has launched discussions to issue won-denominated foreign exchange stabilization bonds for the first time in 21 years as part of measures to stabilize the value of the local currency.

According to the Ministry of Economy and Finance and the Bank of Korea on Tuesday, the two are in discussions to issue won-denominated FX stabilization bonds from next year. The bonds are expected to be issued with relatively short maturities of one to two years.

FX stabilization bonds are issued by the government with the purpose of raising funds to stabilize the value of the Korean won. Previously, foreign exchange authorities have intervened in the exchange rate by selling the U.S. dollars held as foreign reserves when the local currency weakened against the greenback.

If issuance begins next year, it will mark the first of its kind in 21 years. There has been no issuance of won-denominated FX stabilization bonds since the establishment of the unified government bond issuance system in 2003.

The government’s issuance of these bonds is believed to be a means of securing additional resources to stabilize the foreign exchange market when necessary, and it is understood not to be solely driven by any urgent need for immediate exchange rate defense.

According to the Bank of Korea on Tuesday, Korea’s foreign reserves stood at $421.8 billion as of July, up $350 million from the previous month.

The finance ministry’s direct involvement in the bonds market through the issuance of bonds with short-term maturities is expected to potentially reduce interest costs and improve the profitability of foreign exchange stabilization funds.