Government: "Korean Government Bond Yields Are High... Limited Possibility of Foreign Capital Outflow"

Establishment of Foreign Exchange Soundness Council in First Half
Roadmap for Attracting Foreign Investment in New Industries Prepared
10-Year Government Bond Yield Surpasses 2.1% Intraday on 15th

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is delivering opening remarks at the Ministerial Meeting on External Economy held at the Government Seoul Office in Jongno-gu, Seoul on the 15th. Photo by Kang Jin-hyung aymsdream@

[Sejong=Asia Economy Reporter Moon Chaeseok] The government judged that the possibility of a sharp outflow of foreign capital is low because South Korea's government bond yields are higher than those of other countries with the same credit rating. In response to increased volatility in the financial and foreign exchange markets due to the rise in U.S. Treasury yields, the government decided to establish a Foreign Exchange Soundness Council. Additionally, to attract foreign investment in new industries such as digital and green new deals, an advanced foreign investment attraction roadmap will be created within the first half of the year.

On the 15th, the government held an External Economic Ministers' Meeting chaired by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki at the Government Complex Seoul, where they finalized the monitoring and response directions for real and financial sectors in the external field, including these details.

Deputy Prime Minister Hong said, "We will strengthen observation and response capabilities regarding recent changes such as the possibility of inflation due to global liquidity expansion and fluctuations in U.S. Treasury yields." According to the Ministry of Economy and Finance, as of the 12th, the 10-year U.S. Treasury yield was 1.63%, up 71 basis points (1bp=0.01 percentage point) from the end of last year. As of 10:35 a.m. on the same day, the 10-year Korean Treasury bond yield surpassed 2.1% again, recording 2.138%. If the market closes at this level, it will be the first time in about two years and three months since December 4, 2018 (2.102%) that it has exceeded 2.1%.

The possibility of a sharp outflow of foreign capital was considered limited. A government official said, "South Korea's government bond yields are higher than those of the U.S. and other countries with the same credit rating, so the possibility of a sudden outflow is limited." According to the government, as of the 11th, South Korea's 10-year government bond yield was 2.09%, higher than the U.S. at 1.54% and the U.K. at 0.73%. The official explained, "Short-term investors' funds may flow out, but mid- to long-term investors such as central banks and sovereign wealth funds are likely to continue investing for portfolio diversification."

However, the government plans to establish a Foreign Exchange Soundness Council within the first half of the year to coordinate and discuss policy directions related to foreign currency soundness of financial institutions. Given the increased volatility as global funds flowed into risky assets such as stocks due to COVID-19, the government judged that risks could increase if government bond yields surge, and thus aims to establish a more sophisticated response system. Additionally, a stress test will be conducted within this year targeting securities firms and insurance companies to assess how well the non-bank sector can respond to foreign currency liquidity shortages.

To attract foreign direct investment (FDI), the government will also prepare a roadmap within the first half of the year. The cash support budget for this year has been increased by 5 billion KRW from last year to 60 billion KRW. The cash support limit relative to FDI will be raised to 40% for advanced and materials, parts, and equipment industries, and up to 50% for R&D (research and development) centers. The national government’s share of cash support will also increase by 10%.

The amendment of the Act on Industrial Cluster Activation and Factory Establishment (Industrial Cluster Act) will be expedited to establish the basis for designating and supporting advanced investment zones. The government plans to actively utilize economic free zones, national industrial complexes, and bio-special zones to create advanced investment zones, offering benefits such as reduced charges, tax incentives, and rental support.

Last year, FDI amounted to 20.75 billion USD, down 11.1% compared to 2019. South Korea's overseas direct investment also decreased by 14.6% from the previous year to 54.91 billion USD last year. Overseas orders reached 35.1 billion USD last year, achieving the highest performance in the past five years.

This content was produced with the assistance of AI translation services.