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South Korea prepares for US rate rise by easing levy on capital inflows

Friday, February 6, 2015 - 11:24

[SEOUL] South Korea said on Friday it would ease some controls on foreign-currency borrowings to prepare for possible market instability in the likelihood of an increase in US interest rates later year.

The government will exclude foreign-currency debt maturing in one year or later from the "macro-prudential levy", and include some non-banking firms on the list of companies subject to the levy, the finance ministry said in a statement.

South Korea introduced the levy in August 2011 to discourage hot money inflows from funds borrowed in advanced countries at nearly zero rates, which investors had then placed in emerging market economies offering higher returns.

Once the US Federal Reserve decides to increase interest rates, funds are expected to flow out of emerging markets. "The volatility in global capital flows is expected to grow significantly in relation to the anticipated US interest rate increase during or after the second half of this year," the ministry said in the statement, which Vice Finance Minister Joo Hyung-hwan read at a scheduled meeting of senior officials.

Mr Joo said after the meeting the changes would be applied sometime in July this year without mentioning details. The vice finance minister added the government has little reason to drastically retune its macroeconomic policies.

The levy had required banks to pay the central bank 0.2 per cent of their outstanding net foreign-currency debt maturing in less than one year, and a smaller amount for the debt with longer maturities.

While the levy will no longer apply to debt of more than one-year maturity, the government will instead expand the target companies beyond banks to include credit firms, insurance companies and brokerage houses, the ministry said, without giving the implementation date.

A senior finance ministry official told Reuters in early January that the government may also ease the rules on banks trading foreign-currency derivatives, another of the controls imposed to curb hot-money inflows.

These moves underscore the South Korean government's concerns about potential capital flight, which some economists said would persuade the central bank against further cuts in interest rates soon despite falling inflation.

REUTERS

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