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Korea’s Offshore Bond Sales Scrutinized on ‘Hidden’ Costs

Korea’s Offshore Bond Sales Scrutinized on ‘Hidden’ Costs

South Korea’s offshore sovereign bond sale may be a good deal for investors, but maybe not so much for the nation’s taxpayers.

The Korean government, which has hired arrangers for a possible offering of foreign-currency notes, is one of the rare sovereigns with high credit ratings that issue overseas debt in dollars and euro.

The problem is that the cash that Korea raises ends up in its massive foreign-currency reserves, where most of it is likely to be invested in safe assets such as U.S. Treasuries. That means it may be offering investors a premium to U.S. debt to get funds, part of which are re-invested in Treasuries, and that could result in a negative margin that adds costs for the Korean government.

And the offshore debt sale would come at a time when Korea’s budget is strained by record spending to fight the coronavirus pandemic.

Korea’s Offshore Bond Sales Scrutinized on ‘Hidden’ Costs

“Given the fact that the foreign reserves are managed conservatively, it may not be easy to avoid negative margins,” said Yoonsok Lee, a senior research fellow at Korea Institute of Finance in Seoul. “I personally think it’s time to review the purpose of the government’s offshore bond issuance and how much it needs to sell such bonds in the mid- to long-term.”

The government should consider the benefits against the cost of issuing offshore bonds given their main purpose is to accumulate foreign reserves to stabilize the nation’s international financial position, a Finance Ministry official told Bloomberg News. A sovereign note sale can help improve foreign investor confidence and set benchmarks for other Korean issuers including state-run banks, said the official, speaking on condition of anonymity.

The government is also trying to improve the return on foreign reserves, according to the official. Nothing has been decided on the latest issuance plan including its currency, he added. About 60% of the reserves were invested in sovereign or quasi-sovereign bonds as of the end of 2019, according to data from the Bank of Korea.

Record Reserves

Keeping ample funds in foreign reserves is important because the cash can be used to intervene in the market to support the home currency when it’s falling.

But some observers say Korea already has plenty of money, with a record $410.8 billion in its reserves, the ninth-highest in the world.

Skeptics also point out that it’s rare for a country like Korea to issue such notes. Only a few other sovereigns with similarly high debt grades such as Qatar and Hong Kong sell bonds overseas in dollars or euros. Governments that offer those securities tend to be emerging economies that need foreign investment to grow.

But Korea has sold dollar bonds every year since the start of 2017. That’s made investors happy, at any rate. When the country issued 10-year notes last year, for example, orders were triple the $1 billion in debt on offer as buyers were keen to get a 55 basis-point yield premium over Treasuries.

©2020 Bloomberg L.P.