[Gangnam Perspective] Year-End Exchange Rate Closing Price and Overseas Retail Investors

As the year drew to a close, exchange rates sent the Korean economy into turbulent waters. Just four trading days before the end of the foreign exchange market on December 30, the won-dollar rate soared more than 10% from its annual low on the 23rd. Beyond the impact on real economic indicators such as inflation, the closing exchange rate on the last trading day is a sensitive figure that determines companies’ debt ratios and the Bank for International Settlements (BIS) capital adequacy ratios for banks. If the year ends with a high exchange rate, companies’ dollar-denominated debts will translate into higher won-denominated liabilities for the 2025 fiscal year, potentially shaking their credit ratings, which are directly linked to funding costs. For banks, the increased won value of foreign currency loans raises risk-weighted assets, thereby lowering their BIS ratios. To shore up soundness, banks may recall existing loans or raise interest rates, which would directly hit ordinary households. Furthermore, the country’s external debt would also increase, placing an even greater burden on the overall economy. This is why year-end periods of exchange rate volatility make companies, the financial sector, and the government extremely sensitive.
This context also explains why Rhee Chang-yong, Governor of the Bank of Korea (BOK), described the won-dollar rate as being in a 'crisis' and expressed serious concern. The unusual move to urgently summon the heads of Korea’s seven major exporters and request them to convert their dollar holdings into won also reflected the gravity of the situation. However, the government’s main target in efforts to stabilize the exchange rate has been so-called Korean individual investors investing in overseas stocks. 'The recent rise in the exchange rate is largely due to domestic investors’ concentration on overseas stock investments.' On November 27, the BOK governor attributed the weakening won to these overseas retail investors. On December 18, the head of the Financial Supervisory Service (FSS) curbed securities firms’ overseas stock marketing, and shortly after, several firms ended their commission-free U.S. stock trading promotions earlier than planned. On December 24, in a strong verbal intervention in the currency market, the government offered a temporary capital gains tax exemption for overseas stock investors returning to the domestic market. Throughout this process, the authorities appeared to exert both pressure and incentives on overseas retail investors.
The rise in the exchange rate is multifaceted. Above all, overseas investments by the three main economic agents—households, companies, and the government—have increased. Individuals are investing abroad as overseas retail investors, while companies are aggressively expanding overseas facilities, partly in response to U.S. tariff hikes. According to the Ministry of Economy and Finance, Korea’s overseas direct investment in the third quarter of this year amounted to $16.06 billion, up 9.3% from $14.69 billion a year earlier. The government is also required to invest $200 billion in the U.S. over ten years due to investment pressure from Donald Trump. In addition, the National Pension Service (NPS) has long expanded its investment territory overseas. Despite a weaker dollar, the narrowing interest rate gap with the U.S. and the government’s expansionary fiscal policy have increased liquidity, further weighing on the value of the won.
This month, there appears to be little correlation between the activities of overseas retail investors and the surge in exchange rates. According to data from the Korea Exchange (KRX) and the Korea Securities Depository (KSD), as of the 23rd—when the won broke through the year’s high of 1,480 per dollar—foreign investors had made net purchases of about 1.5 trillion won in domestic stocks and 11.65 trillion won in bonds, totaling 13.15 trillion won. During the same period, individual investors’ net purchases of overseas stocks and bonds amounted to 3.44 trillion won ($2.384 billion). Compared to the foreign capital inflow, the firepower of Korean retail investors is not significant. Moreover, overseas investment products are still Korean assets. Why should the National Pension Service be allowed to invest abroad, but not individual investors? As of the end of last year, Korean individuals’ overseas assets totaled $228.2 billion (about 327 trillion won), equivalent to 53% of the country’s foreign reserves of $430 billion. It is only a matter of timing and scale before these funds return to Korea. As these are overseas assets based on key currencies, they can also serve as a safety net for the currency market in times of crisis. Furthermore, we should reflect on whether Korea is truly advancing as a financial powerhouse. No advanced country blames individuals for currency risk. In fact, having the National Pension Service realize gains on some of its overseas assets (798 trillion won as of the end of September) could be a quicker solution. The savvy retail investors who continue to grow their assets in global markets are not at fault.
winwin@fnnews.com Reporter