Key Takeaways
- • Kim Jeongsik, Professor Emeritus of Economics at Yonsei University, argues South Korea's planned sovereign wealth fund should prioritize overseas investment for returns rather than domestic political goals.
- • The proposed fund targets more than KRW 20 trillion in initial capital, but only KRW 1 trillion is actually available for investment: KRW 500 billion from the Future Response Fund and KRW 500 billion in dividends from public institution shares.
- • The author contends overseas sovereign assets would act as a second line of foreign exchange reserves, since private-sector net overseas assets would be hard to repatriate in a crisis.
- • The Bank of Korea forecasts a $450 billion current account surplus this year, but a semiconductor downturn or rising China competition could reverse the won's trend and pressure reserves.
Summary
The article, an insight and opinion piece by Kim Jeongsik, frames sovereign wealth funds as a response to shifting global economic dynamics, including China's rise and U.S. protectionism and dollar stablecoin policies. It cites the U.K. Treasury's plan for an energy sovereign wealth fund funded by North Sea oil and gas tax revenues, and Norway's fund, which has reached $2.4 trillion since its establishment in 1996.
In South Korea, tax revenues have risen amid a semiconductor boom, and the government plans a sovereign wealth fund comprising a Future Response Fund and a Strategic Investment Account at the Korea Investment Corporation for domestic high-tech industries. The government has proposed more than KRW 20 trillion in initial capital, including shares in the Korea Development Bank, the Export-Import Bank of Korea and the Industrial Bank of Korea. Kim notes that cash actually available for investment is only KRW 1 trillion, and argues that higher tax revenues should be directed into the fund to expand its capacity.
On foreign exchange, Kim argues the fund should serve as a second line of reserves. South Korea lacks an international currency and remains exposed to foreign currency shortages. Although net overseas assets have grown, they are held by the private sector and would be difficult to bring home in a crisis. U.S. designation of South Korea as a currency manipulator has also constrained market intervention. Kim recommends increasing overseas public investment, following Norway and Singapore rather than the U.K.'s domestic focus.
Kim contends the fund should be managed for returns. Because the Future Response Fund already targets domestic growth industries, the sovereign fund should focus on overseas investment; using it for regional development or youth employment could reduce returns and increase loss risk. He also warns that the Bank of Korea's forecast of a $450 billion current account surplus, driven by semiconductor exports, could reverse if chip demand falls because of U.S. rate hikes or if China's semiconductor competitiveness improves, potentially prompting intervention that depletes reserves.
In South Korea, tax revenues have risen amid a semiconductor boom, and the government plans a sovereign wealth fund comprising a Future Response Fund and a Strategic Investment Account at the Korea Investment Corporation for domestic high-tech industries. The government has proposed more than KRW 20 trillion in initial capital, including shares in the Korea Development Bank, the Export-Import Bank of Korea and the Industrial Bank of Korea. Kim notes that cash actually available for investment is only KRW 1 trillion, and argues that higher tax revenues should be directed into the fund to expand its capacity.
On foreign exchange, Kim argues the fund should serve as a second line of reserves. South Korea lacks an international currency and remains exposed to foreign currency shortages. Although net overseas assets have grown, they are held by the private sector and would be difficult to bring home in a crisis. U.S. designation of South Korea as a currency manipulator has also constrained market intervention. Kim recommends increasing overseas public investment, following Norway and Singapore rather than the U.K.'s domestic focus.
Kim contends the fund should be managed for returns. Because the Future Response Fund already targets domestic growth industries, the sovereign fund should focus on overseas investment; using it for regional development or youth employment could reduce returns and increase loss risk. He also warns that the Bank of Korea's forecast of a $450 billion current account surplus, driven by semiconductor exports, could reverse if chip demand falls because of U.S. rate hikes or if China's semiconductor competitiveness improves, potentially prompting intervention that depletes reserves.
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