Seoul unveils levy on banks’ foreign debt
SEOUL: South Korea unveiled its plan for a levy on banks' foreign-currency debt Sunday, joining its Asian neighbors in trying to stem speculative foreign capital inflow.
Seoul will impose a levy on the balance of foreign-currency-denominated debt, excluding foreign-currency deposits, of Korean banks and local branches of foreign banks, possibly from the second half of next year, financial authorities said in a joint statement.
The announcement came after the International Monetary Fund gave its blessing for emerging economies to adopt capital control measures at the latest summit of the Group of 20 industrial and developing nations in early November. It also follows two separate plans by Seoul this year to lower the adverse effect of rapid flows of foreign capital. The authorities-the Ministry of Strategy and Finance, the Bank of Korea, the Financial Services Commission and the Financial Supervisory Service-expect the levy to limit the volatility of capital flows, improve the quality of offshore borrowings and strengthen the nation's ability to overcome future crises.
Seoul's plan "shouldn't be considered as a capital control as the levy will be imposed on the balance of the foreign debt, not per transaction [of offshore borrowing]," Vice Minister of Strategy and Finance Yim Jong-yong said.
As of October, such foreign debt of local banks totaled a combined $168.9 billion. For local branches of foreign banks it was at $104.6 billion. Despite its relatively solid fundamentals, South Korea, Asia's fourth-largest economy, has experienced severe foreign-currency liquidity shortages twice: once during the 1997-1998 Asian financial crisis and again during the 2008 global financial crisis. Recent investments of capital seeking higher return from advanced economies suggest that the same crisis could return once the U.S. scraps emergency measures adopted follwing the global financial crisis. -PB News