Goldman Sachs On Outbound Flows Driving FX Trends

The US Bank discusses the increased importance of financial outflows from South Korea in driving FX trends. It also notes the seasonality of such flows, particularly with the current account as well. See below for more details:

Goldman Sachs: "Korea’s outbound financial flows are increasingly important for forex markets. The outflows are large, reaching 6.5% of GDP on average over the last five years. They have also been steadily rising on maturing demographics, with gross foreign assets accumulating to 130% of GDP in 2023, which makes Korea one of the largest EM holders of net foreign financial assets. Portfolio outflows, skewed increasingly to equities, account for most of the outflows. Social security funds represented 70% of portfolio outflows in 2023 with record outflows of $31bn, compared with Korea's current account surplus of $35bn.

Portfolio outflows have strong seasonality, with strong outflows in Q1 being partly reversed in Q3. This, together with similar seasonality of the current account, could create intra-year KRW volatility, implying that the recent weakness in KRW might reverse in the near term as adverse seasonality fades.

Over the medium term, outbound flows from social security funds will likely approach inflection points. The National Pension Services (NPS), by far the largest fund in Korea and the third largest pension fund in the world, will likely turn into operational deficit in 2030, with pension outlays rising faster than contributions. The overall balance including investment income could also turn into deficit around 2040, cutting into NPS assets. The inflection trajectory could create a large swing for the KRW. Its increasing outflows over the medium term would put weakening pressure on KRW into 2030, given its low hedging ratios of below 4%, but the pressures could reverse sharply as repatriation starts afterwards while its open forex positions are large and growing (90% of central bank reserves in 2023). In comparison, Taiwan lifers with similar investment mandates have forex hedging ratios of around 70% and open forex positions limited to 30% of reserves.

The forex implications point to the potential need to reduce forex risks of the pension fund in coming years to avoid potential disruptions in forex/money markets. Given high cyclicality of Korea’s current accounts and KRW markets' vulnerability to global shocks, policy options include closer coordination on forex hedging among policymakers as foreshadowed by recent NPS-BOK swap arrangements and KRW market reform as currently pursed by the government."