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Seoul to Fight Strong Won

Policymakers Encourage Capital Outflow


The government Monday unveiled programs to encourage Koreans to invest more overseas in a move to fight off the appreciation of the won.

To engineer a yearly capital outflow of $15 billion from this year, it will exempt taxes on capital gains realized from investments in overseas securities and allow state-run funds to invest in foreign stocks and bonds.

The Ministry of Finance and Economy said Koreans will be able to invest as much as $3 million in overseas real estate, up from the current ceiling of $1 million.

Deputy Prime Minister and Finance-Economy Minister Kwon O-kyu said the latest measures will lead to an additional outflow of $10-15 billion per year. Seoul is not expected to make a strong push to encourage foreign portfolio capital inflow and foreign direct investment in the face of a stronger won, analysts said.

Kwon said the won’s appreciation against the dollar will moderate as a result. The local currency strengthened 8.2 percent against the greenback last year, weakening the price competitiveness of exports.

“There has been excess liquidity in the local financial market and we think a considerable amount should head overseas.

The government has decided to ease restrictions and carry out a number of steps to facilitate the outflow of dollars,?Kwon said.

The government will temporarily exempt capital gains taxes on indirect investments in foreign securities through brokerage houses and trust companies for three years, while allowing staterun funds, including the National Pension Fund, to directly invest in foreign stocks and bonds.

Individuals are also allowed to purchase homes and land abroad worth up to $3 million for investment purposes, up from the currently limit of $1 million.

The Bank of Korea (BOK) will use about $5 billion for lending to banks so that they can buy foreign stocks and bonds. Banks will be encouraged to lend more to local firms investing overseas, he said.

Banks and state-run enterprises will be discouraged from borrowing foreign currency loans _ also a move to discourage capital inflow. The government is adopting an aggressive capital outflow program even at the risk of helping the rich siphon off wealth overseas to evade gift and inheritance taxes for their children.

Shin Min-yong, a senior economist at LG Economic Research Institute, said that the government is placing its top priority on taking excess liquidity out of the local financial market through overseas investment promotion.

“There is a possibility that companies and individuals could stop investing here as they are allowed to almost freely invest in foreign countries. But that is not what the government is concerned about at the moment,?Shin said.


# The Korea Times [January 16, 2007]

By Lee Hyo-sik
Staff Reporter