South Korea’s foreign reserves dropped to their lowest level in nearly five years in January, reflecting the country’s ongoing struggle with a weak local currency. According to data from the Bank of Korea (BOK), the foreign reserves stood at $411.01 billion at the end of January.
This marked a significant decline of $4.59 billion from the previous month. It was the lowest figure since June 2020, when reserves amounted to $410.7 billion.
This drop in reserves is the largest since April 2024, and the decline is largely attributed to South Korea’s financial authorities taking steps to counter the volatility in the foreign exchange market.
The South Korean won has been under pressure, and in December, it sank to its lowest point in nearly 16 years, falling below 1,460 won to the U.S. dollar.
This weakness in the local currency persisted throughout January, driven by a combination of factors such as domestic political unrest and the continued strength of the U.S. dollar.
Foreign securities, including U.S. Treasuries, constituted the largest portion of South Korea’s foreign reserves. By the end of January, the value of these foreign securities had decreased by $4.65 billion, reaching $362.02 billion.
These securities made up 88.1 pc of the total foreign reserves. However, deposits saw a slight increase, rising by $70 million to $25.29 billion.
South Korea’s foreign reserves are made up of a mix of securities, deposits in foreign currencies, Special Drawing Rights (SDRs), gold bullion, and the country’s position with the International Monetary Fund (IMF).
Despite the dip in reserves, South Korea remains the ninth-largest holder of foreign reserves globally. The top five countries holding the largest reserves are China, Japan, Switzerland, India, and Russia.
The decline in South Korea’s foreign reserves comes at a time of heightened uncertainty in the global economy.
The Bank of Korea has expressed concerns over rising prices of global oil and agricultural products, fluctuations in the local currency, and domestic demand. These factors could further complicate the inflation outlook for the country in the coming months.
In fact, inflationary pressures have already been evident, with South Korea's consumer prices rising by 2.2 pc on-year in January. This marked the highest inflation rate in six months.
The BOK has revised its forecast for 2025, projecting a 1.9 pc increase in consumer prices. The central bank is closely monitoring these trends, as the effects of higher inflation could lead to tighter financial conditions.
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