Ministry plans to fight foreign capital outflow

The Korean government is expected to reduce the volume of new long-term bonds issued next month to adjust liquidity in the local market, a senior policy maker said yesterday. The move is considered part of a pre-emptive measure to cope with possible foreign capital outflow following recent remarks made by U.S. Federal Reserve Chairman Ben S. Bernanke that the Fed may end its fiscal stimulus policy by the middle of next year.

“In the treasury market, [we will] adjust liquidity in a flexible manner by scaling down the size of long-term bond issuance in July,” Vice Finance Minister Choo Kyung-ho said yesterday. His comments were made at an emergency macroeconomic financial meeting at the Korea Federation of Banks in Myeong-dong, central Seoul. Other officials present were Chung Chan-woo, vice chairman at the Financial Services Commission, and Park Won-shik, deputy governor of the Bank of Korea.

On Wednesday, Bernanke said that the Fed could scale down its quantitative easing later this year before the full exit from expansionary policy. Bernanke’s comments rattled the global financial market, prompting treasury yields to rise. The finance ministry’s plan could prevent the Korean financial market from fluctuating in case of foreign capital outflow. But the government has yet to decide by how much it will reduce bond issuance. Industry insiders expect details as early as Thursday.

As for now, Choo said during the meeting that Korea’s fundamentals, including current account surplus and foreign reserves, remain strong compared to other emerging countries.

“The possibility of the Fed’s early exit from its stimulus shows optimism over the U.S. economic recovery in the mid and long-term,” Choo said. “And that will give a boost in our exports.”

The Finance Ministry further explained in a statement that the Fed’s continuous message from May that it may end its expansionary measures has not yet dealt a big blow to the Korean stock market as it has in other countries. The ministry, citing Bloomberg data, pointed out that Korea’s benchmark Kospi fell 8.6 percent on average between May 22 and June 21. The plunge, which was mainly due to foreign investors’ massive withdrawal of local stock investments, wasn’t as deep as other countries like China (10 percent), Brazil (16.7 percent), Russia (14.5 percent), Indonesia (13.3 percent), Japan (15.3 percent) and the Philippines (16.3 percent).

Fluctuation in currency exchange was also limited.

In the local currency market on Wednesday - one day before Bernanke’s remarks - the won closed at 1,130.8 won against the dollar, while on Friday - one day after the remarks - the won closed at 1,154.7 won per greenback. Over two days, the won’s value against the greenback fell 2.07 percent, the ministry said.

BY LEE EUN-JOO [angie@joongang.co.kr]