SEOUL, South Korea (AP) — South Korea plans to impose a levy on non-deposit foreign currency debt held by domestic and foreign banks in a bid to defend the country against capital surges that could threaten its economy, financial authorities said Sunday.
The announcement comes as emerging countries take steps to control the movement of so-called “hot money” from abroad that they say drives up the value of their currencies and destabilizes their markets. Foreign investors have sought higher returns in fast-growing developing economies amid ultra-low interest rates and other stimulatory monetary policies in advanced countries such as the United States and Japan.
South Korea has already announced measures to impose limits on investments by domestic and foreign banks in foreign exchange derivatives trading and has taken steps to bring back a tax on foreign investment in government bonds as ways to shield itself against capital movements.
“A surge of capital inflows could lead to inflation and asset price bubbles, and a sudden reversal of such inflows could possibly result in systemic risk,” said a statement released by the Ministry of Strategy and Finance.
The size of the charge has yet to be determined, though it will be levied on “non-deposit foreign currency liabilities” held by domestic banks and the South Korean branches of foreign banks, according to the statement. The levy on short-term debt, seen as more of a risk, will be higher.
Related legislation will be introduced to the National Assembly, South Korea’s legislature, in February. Implementation is expected in the second half of 2011.
The plan was announced jointly by the ministry and other financial authorities, including the central bank and regulators.