What is behind the growing concern about the decline in the competitiveness of South Korean sovereign wealth funds?

New funds entrusted to the government’s Korea Investment Corporation (KIC), a government-backed fund, were effectively suspended from 2022 until last year. Some argue that KIC has concerns about its international competitiveness. At a time when competing sovereign wealth funds are using large amounts of financial support as a weapon to secure profitable global assets, the fear is that new investment capital will be cut short. The reason is that KIC, which currently exists in Japan, may weaken its competitive position.

According to the Ministry of Economy and Finance (MOEF) and KIC, on January 7, new funds committed to KIC for 2022-2023 totaled just $500 million. In 2022, KIC received zero new entrusted funds for the first time since its establishment in 2005, but last year it secured approximately $500 million (70 billion yen) in yen-denominated foreign exchange balanced bonds issued with the aim of recovering the exchange rate. relationship with Japan. This was the entire amount of new funding received. Historically, KIC has received an average of at least US$4 billion to US$5 billion of new entrusted funds each year under various administrations, with the highest amount amounting to US$11 billion to US$12 billion. However, over the past two years, financial inflows have noticeably stopped. In particular, KIC received $14.8 billion from 2006 to 2007 during the early Roh Moo-hyun administration, $35.2 billion from 2008 to 2012 during the Lee Myung-bak administration, and $45 billion during the Park Geun-hye administration. From 2013 to 2016, it was $22.1 billion, and from 2017 to 2021, during the Moon Jae-in administration, it was $22.1 billion.

Starting in 2022, foreign exchange authorities have been releasing foreign exchange reserves up until last year, mainly to stabilize exchange rates in response to rising global interest rates and a stronger US dollar. KIC manages foreign currency entrusted to it by the Ministry of Economic Affairs and the Bank of Korea. Foreign exchange reserves, which were $463.1 billion at the end of 2021, decreased to $420.15 billion at the end of last year.

Last year, KIC faced new financial difficulties after its foreign exchange stabilization fund, another source of funding, dried up due to a significant tax revenue shortfall. Last year, when the Ministry of Economic Affairs faced a tax revenue shortfall of 54 trillion won (approximately US$41.03 billion), it implemented “austerity measures” that drew 20 trillion won from the Foreign Exchange Stabilization Fund to address challenges posed by exchange rate fluctuations. did.

In the financial industry, concerns have been raised that KIC’s entrustment structure is unstable and that its competitiveness may decline due to fluctuations in the foreign exchange market. Long-term investors, such as sovereign wealth funds and pension funds, view the acquisition of new trust funds as a key factor in improving returns.

Some argue that it is necessary to consider options to expand the means of securing funds for KIC. Norway’s sovereign wealth fund “NBIM” and sovereign wealth funds in the Middle East use profits from resource development such as oil and natural gas as a source of funding. In addition to foreign exchange reserves, the Government Investment Corporation of Singapore uses public pension funds and government surplus as its funding sources.