South Korea announced measures to protect themselves against sudden capital outflows

South Korea announced measures to protect themselves against sudden capital outflows as military tensions with North Korea raised concerns investors will withdraw funds from the fourth largest economy in Asia.

The government said Monday it intends to implement a tax on loans from foreign exchange banks, stiffen the punishment for improper reporting of currency transactions and may tighten the rules on derivatives. It is considering a 20 basis points rate debt maturing in less than a year, Vice Finance Minister Yim Jong Yong said.

Nations from China to South Africa are trying to limit the volatility of the currency as close to zero borrowing costs in the advanced economies to stimulate demand for higher-yielding assets in emerging markets. South Korea also is concerned about money leaving the country because of military tensions, "said the young researcher Jeong Sik.

"After suffering two financial crises in recent years, Korea wants to better protect themselves and cope with capital flows," said Jeong, a researcher at Samsung Economic Research Institute in Seoul. "Circumstances are global for the controls and are increasingly nervous over rising tensions with North Korea and the consequent possibility of capital flight."

Military tensions

The more stringent proposed restrictions on capital flows and speculation that North Korea will retaliate against the exercise of his neighbor's heavy artillery in action in South Korea. South Korea began a live fire drill today as the United Nations Security Council failed to agree on measures to ease tensions.

South Korean won rose 0.2 percent to 1,150.25 per dollar at 3:00 pm close in Seoul, recovered earlier losses of up to 1.7 percent. The Kospi index of shares fell 0.3 percent to close at 2,020.28. three years South Korean government bond yield was unchanged at 3.35 percent, according to the price of Korea Exchange.

The bank's contribution will be levied on non-deposit liabilities in foreign currency held by all domestic and foreign lenders, according to a joint statement issued yesterday by the Ministry of Strategy and Finance, the Bank of Korea and Financial Supervisory Service.

The short-term debt, which poses a greater risk, subject to a charge higher than long-term loans, financial authorities said, adding that banks pay in U.S. dollars. Product of the charge will be used to provide liquidity to financial institutions in times of risk, "said Yim.

"Vulnerable"

"We wanted to regulate the systemic risk of excessive capital inflows and outflows, and determined the application of a bank levy would be good to reduce volatility," Yim said in a press conference in Seoul yesterday after the measure was announced. Be proposed to the National Assembly in February, and will enter into force on July 1 if approved, said Yim.

The country is "very vulnerable" to sudden changes in the global economy and the sudden movements of capital, the statement said. Foreign investors withdraw funds in the short term led to a financial crisis in most of Asia for more than a decade.

The proposed levy will likely reduce demand for banks to borrow funds abroad in the short term, the Bank of Korea Kim Seung Won economist, said.

Kim said in a research paper that increased foreign exchange reserves tend to increase short-term foreign loans, the risk of failure of the nation falls, prompting banks to rely more on short-term money because of cheaper borrowing costs.

Derivatives Rules

South Korea can pull the plug on the operation of banks derivatives exchange after completing a review on January 9, Yim said yesterday. The government in October, established a limit of 250 percent of the shares of foreign banks and 50 percent for domestic banks to reduce volatility in capital flows and trade in livestock.

The government will strengthen punitive measures in the reporting of foreign exchange activity, the statement said. Domestic banks held 168.9 billion U.S. dollars in liabilities in foreign currency deposit not from October and branches of foreign banks was 104.6 billion U.S. dollars, he added.

Emerging economies have been the introduction of capital control measures in recent months to cool investment from abroad. Taiwan last month announced a plan to restore the brakes on foreign investment in debt, only to allow offshore funds to be up 30 percent of their portfolios invested in all types of government bonds and products money market. Brazil tripled a tax on local purchases of fixed assets of foreign investors in October.

The increase in cattle

The won has appreciated 34 percent since February last year, the biggest winner in Asia, the damping of the nation's economic growth driven by exports.

South Korean regulators began an audit of how banks should manage foreign currency derivatives on October 19 to address the speculation. The National Assembly on 8 December approved a bill from January 1 tax interest income from treasury bonds and central banks to 14 percent and put a 20 percent tax on profits capital from their sale.