Seoul un­veils levy on banks’ for­eign debt

The Pak Banker - - Front Page -

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

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