South Korea, which suffered a sudden outflow of capital in 2008, has no plans to curb record purchases of its debt by foreign funds and will sell 30-year bonds aimed at such investors, a South Korean finance ministry official said.
The level of foreign investment is “manageable” and no curbs are planned, Shin Hyung-chul, director general of the treasury bureau at the Ministry of Strategy and Finance, said in an interview on Thursday last week in Gwacheon, south of Seoul.
The government will “gradually increase” issuance of securities maturing in a decade or more to stabilize fundraising, he said.
“Foreign investors, especially insurers, have shown keen interest in the 30-year notes, and we expect the sale to be done smoothly,” Shin said. “Overseas central banks, including Norway and Switzerland, have entered the South Korean debt market recently, and these moves reflect their positive views on the [South] Korean economy.”
Overseas funds raised holdings of the nation’s bonds to a record 88.5 trillion won (US$78 billion) last month, the Financial Supervisory Service said on Wednesday last week.
The ministry plans to sell 30-year debt from September, raising 400 billion won each month, the government said in January.
“Foreigners’ investment pattern in [South] Korean bonds had been short-term focused, targeting interest-rate differences, but this seems to be changing with more long-term funds entering the market,” said Kong Dong-rak, a Seoul-based fixed-income analyst at Taurus Investment & Securities Co in Seoul.
Authorities are concerned about capital flows as they can reverse abruptly, and are considering whether the measures imposed so far are sufficient, Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland PLC, wrote last month in a note to clients.
In January last year, the government revived a tax of as much as 14 percent on interest income from treasury bonds held by foreigners, as well as a 20 percent levy on capital gains from their sale.
“Compared with countries that have a similar credit rating, South Korea has higher yields and stable government finances,” said Shin, 52, who worked at the treasury bureau for nearly 10 years in his 28-year career in government.
“The new issuance of longer-dated bonds shows faith in South Korea’s economy,” he said.
Moody’s Investors Service raised South Korea’s credit rating outlook this month to positive from stable, citing “very strong and improving fiscal fundamentals.”
The rating remains at “A1,” its fifth-highest grade. The economy, which grew the least in two years in the last three months of last year, might have bottomed out last quarter and will return to a recovery path this quarter, South Korean Finance Minister Bahk Jae-wan said on Wednesday last week.
Foreign investors held 17.8 percent of government debt as of the end of last year, compared with 8.4 percent in 2008, according to a finance ministry statement in January.