S. Korea's new finance minister cautious on adopting Tobin tax

South Korea's new finance minister said Saturday that it needs to be cautious of adopting the so-called Tobin tax, indicating that such a measure could trigger a capital outflow.

The South Korean government said earlier that the country may move to tighten its regulation on capital flows in and out of the country amid worries that growing volatility in the currency market could hurt the country's overall economic stability.

As part of the new measures, the government said it is considering introducing taxation on foreign currency transactions, called the Tobin Tax, in order to ease market fluctuations caused by an infusion of hot money.

"We need to discuss more whether to strengthen existing measures, or introduce a new step," Hyun Oh-seok told reporters. "When we formulate new measures, we should keep in mind their side effects," he said.

Financial market stability is a major cause for concern for the Korean government, which has experienced economic crises caused by financial market meltdowns.

Since 2010, Korea has implemented a set of the so-called macro-prudential measures to ease volatile cross-border capital flows, including bank levies and tighter regulations on banks' foreign exchange (FX) derivatives positions.

Late last year, the government announced that it would lower the ceiling of FX forward positions held by local and foreign banks by 25 percent amid the local currency's gain and said that it would take further actions if needed.

The finance minister also worried over the weakness of the Japanese yen, saying that a set of economic policies to be revealed next week include measures to help boost local exporters' competitiveness in overseas markets.

Hyun signaled that the government may trim its growth outlook for the year, adding that revised estimates will be revealed next week.

"Given the current trend, this year's economic growth rate may be lower than previously estimated," Hyun said. "That's why we are working on economic recovery measures."

In December, the government trimmed the growth estimate for Asia's fourth-largest economy to 3 percent from 4 percent citing weak domestic and overseas demand.

The Bank of Korea, the country's central bank, also cut its growth estimate to 2.8 percent from 3.2 percent.

As to calls for deregulations on the local property market, Hyun said his ministry would take all macrcoeconomic polices into account.

"The property market is not the only factor in mapping out economic policies," Hyun said, signaling that current regulations on home purchases would be maintained for the time being.

The local property market has taken a dive in the past few years, forcing some mortgage holders to auction off their property.

The bulk of banks' mortgage loans in South Korea are tied to the loan-to-value ratio (LTV), a gauge used by banks to determine the amount of a home-backed loan approvable based on the price of the house. The ratio varies with cities but the average is 50 percent for Seoul and the metropolitan area, and 60 percent in rural regions.
Local banks' household loans, including home-backed and credit loans, amounted to 459.3 trillion won as of the end of August, up 1.5 trillion won from the previous month, according to the Bank of Korea. Of the figure, the mortgage lending stood at 311.6 trillion won as of end-August.

[Yonhap]