Korea mulls tripling NPS' advance dollar funding limit

South Korea is considering tripling the maximum amount of dollars the National Pension Service (NPS) can buy from the domestic foreign exchange market for advance funding to $3 billion a month to mitigate its impact on the local financial market, according to welfare and finance ministry officials on Tuesday.

The Ministry of Health and Welfare, which oversees the NPS, is together with the Ministry of Economy and Finance discussing raising the upper limit of NPS' monthly dollar purchases to $3 billion from $1 billion, excluding dollar buying for settlement purposes.

"As NPS is increasing overseas investments, so its dollar demand is increasing," said a welfare ministry official.

“We are seeking to expand the advance dollar funding limit as a means to minimize NPS' influence on the foreign exchange market,” he told The Korea Economic Daily.

The government wants the world’s No. 3 pension scheme to spread out dollar purchases over a longer period, instead of buying the US currency in lump sums to settle deals.

Since October of last year, the pension plan has been allowed to secure up to $1 billion for advance funding purposes every month.

Previously, it had been barred from securing dollars at home for pre-funding. Thus, it had to make massive dollar purchases to execute offshore investments, putting downward pressure on the won.

The increase in the upper limit on advance dollar funding will likely come into effect shortly after getting the nod from the National Pension Service Investment Management committee as early as next month, the sources said.

That is different from the foreign currency swap agreement signed with the Bank of Korea (BOK), under which NPS is allowed to tap BOK’s foreign exchange reserves.

A finance ministry official said it is in the early stages of discussions with the welfare ministry about raising NPS' advance dollar purchase limit and will be adjusted considering the average amount of NPS' dollar purchase.

The NPS buys $2 billion-$3 billion in dollars a month from the domestic forex market on average, including dollars for advance funding.

The average daily balance of its foreign currency holdings stood at $600 million as of the second quarter of this year.

“If the advance funding limit is upped to match its monthly overseas investments of 2 to 3 billion dollars, its impact on the foreign exchange market will be reduced,” the welfare ministry official explained.

The won has been on a downward trend since the start of this year. In April, it hit a 17-month low of 1,400 won to the dollar. On Tuesday, the Korean currency ended domestic trade at 1,390.6 to the greenback.

With a rise in its dollar purchase limit, NPS will be able to buy dollars on the dip and beef up investment returns. It will also be able to meet capital calls from foreign asset managers in a timely manner.

Overseas assets ranging from stocks to bonds and alternatives comprised 55% of NPS’ assets under management of 1,101.3 trillion won ($795 billion) as of the end of March, worth around 606 trillion won, according to the NPS.

That compared with its overseas asset holdings of 256.8 trillion won as of the end of 2019, or 34.9% of its portfolio.

NPS plans to further raise its exposure to overseas assets to about 60% by 2028, according to its mid-term investment plan released by the welfare ministry in October of last year.

INVESTMENT RETURNS

Global portfolios significantly outperformed domestic ones.

NPS earned an 11.96% return from overseas stocks between 2021 and 2023 on average, much higher than the 0.21% gain from domestic stocks during the same period.

Global bonds yielded a 3.47% return during the period, outperforming the 0.15% return on domestic bonds.

A 1-percentage-point rise in investment returns will likely delay the depletion of the pension fund by five years, currently expected to run out of funds by 2055, according to the welfare ministry’s forecast released last year.

Meanwhile, NPS agreed last month to raise the upper limit of currency swap lines with the Bank of Korea to $50 billion from $35 billion through the end of this year.

A government official said the increased currency swap lines would likely remain in place beyond the pre-agreed period, unless the domestic dollar/won rate stabilizes by the end of this year.  

Write to Se-Min Huh and Jung-Hwan Hwang at semin@hankyung.com

Yeonhee Kim edited this article.