South Korea announced yesterday it would restore a tax on foreigners buying government bonds, warning that excessive capital flows could destabilize the economy and push the local currency even higher.
The move is the latest in a series of measures by emerging markets to curb a flood of capital from the US and elsewhere, which is pushing up their currencies.
The South Korean Finance Ministry said it supported two bills submitted to parliament last Friday that would re-impose the tax on capital gains and interest income from the bonds.
One would allow flexibility to cut or remove the tax as needed for market stability and would take effect at the start of next year. The other would restore the 14 percent withholding tax immediately.
“Excessive capital flows could damage the stability of the economy,” the ministry said in a statement, adding it would discuss details of the bills “for prompt revision.”
The US Federal Reserve’s move to pour an additional US$600 -billion into the US economy has heightened worries about a destabilizing flood of capital into emerging markets in search of higher non-dollar returns.
Thailand, Brazil and other countries have already taken measures to restrain the flows.
The Fed’s move came in for strong criticism at last week’s G20 summit from China, Germany and other nations. They say Washington is effectively devaluing the greenback and encouraging -capital inflows overseas.
The ministry said the US’ “-quantitative easing” and ultra-low interest rates in developed countries had triggered large capital inflows into emerging markets.
Apart from potential destabilization, South Korea fears that the won’s ascent — it has risen more than 15 percent against the US dollar from its May lows — may damage the export-dominated economy.
In the first 10 months of this year, the ministry said, net investment in Korean bonds stood at 21.1 trillion won (US$18.6 billion).
Foreigners at the end of last month held 7.1 percent of all outstanding bonds and 14.9 percent of Korean treasury bonds, compared to figures of 4.3 and 8.4 percent respectively at the end of 2008.
The trend was expected to continue because of the expansion of global liquidity, it said.
The finance ministry lifted the 14 percent withholding tax in May last year in an attempt to help the country join the Citigroup-run World Government Bond Index. That did not happen.
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