Amidst the instability of the Won-Dollar rate, South Korea's NPS promotes the issuance of foreign currency-denominated bonds

The Korean Ministry of Health and Welfare announced a plan to issue foreign currency-denominated bonds through the National Pension Service (NPS), one of the world’s largest pension funds, by the end of the year. According to Deputy Minister Lee Joo-ran, this strategy aims to respond to exchange rate fluctuations, diversify funding sources, and efficiently manage foreign exchange portfolios. This will be the first official announcement of dollar-denominated bond issuance by the NPS, and it is seen in the market as a significant shift in South Korea’s currency policy.

Major Challenges for Fund Management Due to Won Depreciation

Over the past few months, the Korean won has depreciated by approximately 7% against the dollar, severely impacting the NPS, which manages assets worth the third-largest in the world. As the won weakens, the value of the fund’s foreign assets is relatively decreasing, highlighting the urgent need for proper exchange risk management.

The Seoul government has responded to these currency pressures by selling dollars in the foreign exchange forward market to support the won. However, there is a growing view that single-market interventions are not a fundamental solution, and more comprehensive funding strategies are being considered.

Capital Outflow Risks and the Complexity of US-Korea Relations

The continued decline of the won raises concerns about further capital outflows. With South Korea planning to invest $350 billion in U.S. industries under a trade agreement with the United States, the pressure from won depreciation to outflow capital adds new complexities to overall economic policy.

By issuing foreign currency-denominated bonds, the NPS is expected to directly secure foreign exchange, helping to address these dual pressures. Funding through dollar bonds can reduce exchange rate risks while strengthening the fund’s stable operational foundation.

Integrated Response System by Government and Financial Institutions

Deputy Minister Lee also revealed that a consultative body comprising the Ministry of Health and Welfare, NPS, Ministry of Finance, and the Bank of Korea held its first formal meeting last month to enhance cooperation for financial market stabilization. This four-party consultative body is a crucial framework for responding swiftly to currency market fluctuations and ensuring policy consistency.

Government officials suggest that issuing foreign currency bonds could contribute to stabilizing the won-dollar rate and may mark a turning point in NPS’s medium- to long-term asset management strategy. Expanding diversified funding methods by the fund is also expected to have ripple effects in reducing overall exchange rate risks for the Korean economy.