IMF to highlight Korea’s capital control

The International Monetary Fund will release a report next week highlighting South Korea’s successful policy response to speculative capital inflows, a government official said.

The report will exemplify the Finance Ministry’s imposition of taxes and limits on speculative trading as legitimate macro-prudential measures.

“The IMF is to release a report about the emerging market’s combating of hot money inflows and it will make a case of Korea as the appropriate management of inflow surges,” he said.

As a surge in fund inflows raises the value of their currencies and lifts upward pressure on domestic inflation, emerging markets from Brazil to Korea have adopted a range of capital controls.

The move, coming after the G20 gave the nod to control of speculative capital movements, underlines Seoul’s strengthened supervision of capital flows to prevent another liquidity squeeze that hit the country at the height of the financial crisis in late 2008.

The Finance Ministry in June capped banks’ currency forward positions to help reduce volatility in the currency market. In November, a 14 percent tax on foreigners’ income from government bonds was reintroduced, causing an exodus of foreign investors from treasuries in December and January. Overseas investors sold a net of 1.77 trillion ($1.57 billion) of won-denominated bonds in January. The figure has improved from a net sale of 5.71 trillion won in December but analysts expect the withdrawal to continue with protracted inflation.

Seoul is also planning to introduce a bank levy on short-term foreign currency loans held by banks from the second half of the year after parliamentary approval to come on March 7.

Bond prices tend to decline under inflationary pressure or signs of fast economic growth, as they prompt the benchmark interest rate to rise. A rate hike devalues the existing bonds issued at lower rates.

“Foreigners flocking to bond market could be more dangerous than having them in local equities. Bond investors, due to their risk-averse nature, flip fast on the slightest dangers ahead and are more speculative than most people think,” the government official said.

By Cynthia J. Kim (cynthiak@heraldcorp.com)