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The cover of the IMF’s “External Sector Report” for 2022. (from IMF website)

Foreign exchange market interventions by South Korean exchange authorities are taking place at a limited level for the purpose of preventing “disorderly” conditions in the market, the International Monetary Fund (IMF) concluded in a report.

The IMF also estimated that South Korea’s current account surplus norm as of last year amounted to 5% of gross domestic product.

On Monday, the IMF published its “External Sector Report” with data for individual countries. In its report for South Korea, it noted that foreign exchange market intervention data shared by the Bank of Korea (BOK) showed net market sales of US$14 billion — 0.8% of GDP — during the second half of last year, which it said was intended to reduce excessive volatility in the won-to-dollar exchange rate.

It also said the scale of South Korea’s foreign reserves, which totaled US$463.1 billion or 25.6% of GDP as of late last year, amounted to around 99% of the suitable level calculated by the IMF and was adequate to respond to external shocks.

In terms of the won-to-dollar exchange rate, the report said the real effective exchange rate (REER) for the won as of May — referring to currency value when prices and the percentage of trade with particular countries are factored in — was 4.7% lower than the average exchange rate last year.

Relative to South Korea’s current account balance scale, the won’s REER as of May was calculated at between -1.6% of the appropriate level (meaning undervaluation or depreciation) and 3.7% (overvaluation or appreciation), with a median value of 1% indicating overvaluation.

Under a model focusing on domestic variables, the won-to-dollar exchange rate as of May was found to be undervalued (depreciated) by 0.8%. Under a model focusing on differences among countries, it was estimated to be overvalued (appreciated) by 4.2%.

In terms of the current account balance, the IMF predicted that South Korea’s surplus this year would decline to 2.8% of GDP amid the effects of high oil prices and supply chain disruptions. Last year, the current account surplus stood at US$88.3 billion, or 4.9% of GDP.

Noting that South Korea’s current account surplus norm for 2021 was estimated at 5.0% of GDP, the IMF said the level was “broadly in line with medium-term fundamentals” and policy conditions.

By Cho Kye-wan, senior staff writer

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