Gov’t plans limits on capital flows

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Gov’t plans limits on capital flows

The Korean government said Friday that it will enhance its control over foreign capital flowing in and out of the country starting as early as July due to increasing uncertainties in the international financial market.

At the headquarters of the Korea Federation of Banks, the Ministry of Strategy and Finance, Bank of Korea and Financial Services Commission agreed to the plan after deciding that global capital flows could fluctuate in the second half of the year when the U.S. Federal Reserve starts raising its benchmark interest rate.

The government agencies are unsure yet whether the Korean market will experience outflows or inflows of capital.

The government said it will expand taxation of foreign borrowing at financial institutions as part of its plan to take preemptive action against overseas risks.

“Due to increasing external uncertainties in global financial markets this year more than anytime before, the movement of capital flows may change frequently,” Joo Hyung-hwan, first vice finance minister, said at the meeting.

“The government will revise its taxation system on short-term foreign borrowing and improve the early warning system for pre-emptive actions.”

However, the government said the fundamentals of the Korean economy are still strong, with $362.2 billion in foreign reserves. Short-term foreign borrowing accounts for less than 30 percent of total borrowing from abroad.

Although the government is not convinced that a U.S. rate hike will result in rapid outflows of capital, it is worried about possible crises that could come from emerging economies such as Russia and Venezuela, which have been hit hard by falling oil prices.

Political woes in Greece and sluggishness in other eurozone economies and China are also concerns.

To further strengthen fundamentals, the government first wants to improve the structure of foreign borrowing.

Currently, the government only imposes taxes on banks that bring in excessive amounts of borrowed foreign capital. Under the new plan, it will also tax securities firms, insurance companies and credit companies.

The amount of taxation has differed in accordance with how long the banks have held the borrowed money.

Starting in July, taxation will be imposed on all foreign debt that a bank has held for less than one year but the rate has not been decided.

The government will also introduce a monitoring system to track the liquidity coverage ratio (LCR), which will help the government monitor proportions of highly liquid assets at financial institutions. These are assets that can be used within 30 days in an emergency situation.

The government said it aims to boost the country’s LCR from 49.7 percent as of last November to 80 percent by 2019.

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