Financial chief promises measures to boost foreign currency deposits

Minister Bahk says Korea-U.S. FTA a ‘third opening’ in bilateral relations


South Korea will soon announce a set of measures to encourage saving in foreign currencies, Finance Minister Bahk Jae-wan said, announcing a plan to boost the private sector buffer against possible capital flight.

Detailing the need for a stronger firewall on top of the central bank’s $306.4 billion in foreign exchange reserves, Bahk told The Korea Herald that the ministry would announce a set of incentives for depositors to keep their savings in foreign currencies.

Bahk touched on a variety of key issues facing Asia’s fourth-largest economy, including foreign currency deposits, the possible elevation of oil prices and the Korea-U.S. Free Trade Agreement. Bahk said the FTA between the two allies marks a “third opening” that will enhance bilateral relations.

Bahk’s plan would dovetail with other measures aimed at reducing volatility in capital flows from last year, such as restrictions on currency derivatives trades and a tax on foreign currency debt at banks.

The minister, however, brushed off the anticipation that the measure would include tax exemptions on the interest earned.

“We figured that there is no such thing as a free lunch. The idea isn’t so attractive as a possible incentive at this stage because we would have to manage the cost of a tax drain,” Bahk said. 

More than 80 percent of foreign currency savings at banks are short-term deposits held by exporters, mostly used to settle payables incurred from trade. The ministry says more individuals need to keep foreign currency deposits for long-term savings to better protect banks against a sudden outflow of funds.

As for international efforts to erect the International Monetary Fund firewall, Bahk reaffirmed that Korea was “willing to participate” to the help the debt-wracked eurozone, but said concerted efforts would not be easy.

“The general consensus is that the IMF firewall should be increased, but there are subtle differences in position. Some want to see more decisive contributions from Europe and others want to quicken the pace of voting power reform at the IMF,” Bahk said.

Korea is not at the right place to take the initiative, or make an independent decision on the matter, he added.

“Some European countries requested that Korea not play solo in making contributions. Negotiations on the level of contributions need to be put together and packaged.”

Bahk picked volatile oil prices as the “biggest threat to the Korean economy” at this point, a bigger and more serious problem to tackle than the European debt risk. He also said that the government’s contingency plan would kick in if the international oil price stayed above $130 per barrel for more than five working days.

“A set of selective support measures will be applied to those who make a living out of oil. But the ultimate remedy to runaway oil prices is to use less of it,” Bahk said. 

By Cynthia J. Kim and Yang Sung-jin
(cynthiak@heraldcorp.com) (insight@heraldcorp.com)