S.Korean companies stockpile record-level dollar holdings

South Korean companies have built up their dollar holdings to record levels, following record-breaking shipment growth this year, as rising raw material costs and continuing component shortages added to global economic uncertainties.

The balance of domestic companies' savings accounts in dollars has swelled to a record high of $65.4 billion as of end-September, an increase of $2.2 billion from end-August, according to the Bank of Korea on Oct. 19.

Their dollar deposits had soared to $63.8 billion in May of this year, before declining in both June and July.

South Korea's double-digit export growth this year boosted their dollar holdings. The country's September exports surged to $55.8 billion, the largest-ever monthly shipments and up 16.7% year-on-year, according to the trade ministry.

The shipments have been on an upward trajectory since November 2020 and posted double-digit year-on-year growth since March of this year, powered by the semiconductor, petrochemical and steel industries.

Exports in the first 10 days of October jumped 63.5% on-year to $15.2 billion, data from the Korea Customs Service showed.

But Korean exporters opted to hold onto the US currency, instead of converting their export settlements into won.

"Their increased dollar holdings reflects the view that the dollar would maintain its bullish bias," said a Bank of Korea official.

Rising inflationary pressures and prospective tapering by the US Federal Reserve prompted investors' preference for safer assets. 

The South Korean currency came under further pressure as China’s economic growth is expected to slow this year due to the deepening debt crisis involving real estate developer Evergrande Group, as well as power outages. China is South Korea's largest shipment destination.

Despite robust exports and record levels of the country's foreign currency reserves, the Korean won has weakened at a more rapid pace than other currencies against the dollar.

In September, the won continued its downward trend and weakened to an average of 1,170.4 per dollar, versus the August average of 1,161.1. 

Last week, it briefly broke below the psychologically important threshold of 1,200.4 per dollar, tumbling to a 15-month low against the dollar.

In financial markets, South Korean investors maintained their buying spree in overseas equities and bond markets.  The balance of their holdings in both securities recorded a new quarterly high at the end of September.

By comparison, the country's households reduced their dollar holdings last month to take profit from the dollar's strength. The balance of their dollar deposits shrank by $460 million to $16.7 billion as of end-September. 

South Korea's foreign exchange reserves climbed to $464 billion as of end-September, reporting a record high for the third straight month.

Write to Ik-hwan Kim at lovepen@hankyung.com
Yeonhee Kim edited this article.