S Korea encourages investment abroad

The South Korean government on Monday unveiled its much-heralded measures to encourage companies to invest more abroad, exempting domestic investors from capital gains tax on overseas equity earnings and easing restrictions on foreign real estate purchases.

Concerned about the impact of the soaring won on exporters such as Samsung Electronics and Hyundai Motor, the central bank has been intervening heavily in foreign exchange markets at the same time as the finance ministry tries to engineer a longer-term solution by encouraging greater capital outflows.

Among the measures announced on Monday, domestic investors will be exempt for three years from capital gains taxes – currently 14 per cent – on earnings from overseas equity investments. Pension funds will be allowed to invest in overseas securities.

The cap on investment in overseas real estate was raised from $1m to $3m (€2.3m, £1.5m), and the finance ministry signalled the limit would be scrapped within three years. To increase financial support for Korean exporters, the state-run Export-Import Bank will issue Won1,700bn ($1.83bn, €1.42bn, £950m) in won-denominated bonds this year.

“We expect a considerable effect,” Kwon O-kyu, finance minister, said of the changes. “The measures will probably lead to an annual outflow of capital worth $10bn to $15bn,” he said, describing this as a conservative estimate.

The won rose by about 9 per cent against the US dollar last year, leading the Bank of Korea to intervene heavily in the currency markets. Its foreign exchange reserves, the world's fifth largest, rose by $4.7bn last month to $239bn.

South Korea is gradually abandoning its decades-long practice of limiting outbound investment, an attempt to keep its wealth at home but which has contributed to a surplus of foreign currency and exacerbated the recent upward pressure on the won.

“The measures are to maintain a balance of the supply and demand in the foreign currency market by promoting an outflow of foreign currencies and adjusting the inflow to an optimum level,” the finance ministry said.

However, analysts said the package was more limited than hoped and would have little impact in the short term. “This is definitely not a big bang,” said Oh Suk-tae, economist at Citigroup in Seoul. “The main change is in tax exemptions but tax is not the primary concern for investors – the market outlook is much more important.”

Likewise, South Korean real estate investors are most interested in the US market, but are likely to be influenced more by concerns about a housing slowdown there than the easing of restrictions.

For that reason, Mr Oh was sceptical about the finance minister’s estimates of the impact, saying the recent surge in outbound equity investment took the total invested to $12bn last year. The government‘s expectation of doubling that looked excessive, he said.

Monday’s measures would not offer any immediate respite for South Korean exporters suffering from the strong won, said Lim Ji-won of JP Morgan.

“The midterm effects are probably quite meaningful but I’m not sure how much short-term impact it will have,” she said. “The Korean won appreciation is driven by exporter selling so it depends on whether exporters’ expectations of the won’s strength will be undermined by this.”

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