On The South Korean Bank Levy
Press is reporting that the government may impose a bank levy next year of about 0.1% on what it terms “non-core overseas debt.” It appears that the authorities are getting more serious about addressing the nation’s high short-term debt exposure. Finance Ministry official said the tax is initially going to be on both short- and long-term external debt, but no further details have been given yet. We are hesitant to call this tax a capital control, as appears to be aimed at local banks that are taking on too much external debt. However, we await further clarification. If controls that impact foreign investors do eventually emerge, it would signal a more aggressive stance by the Korean authorities as USD/KRW was about 4% above the year’s low around 1103 when the bank levy was reported today.
As we noted last week when S&P affirmed its A rating on Korea with a stable outlook, the agency said that Korea is vulnerable to the banking sector’s “significant” short-term external borrowing that can be withdrawn on short notice. We note that our own sovereign ratings model puts Korea at A/A2/A vs. actual ratings of A/A1/A+, and wrote then that “We agree with S&P’s rating, and note that reducing its short-term external debt by around $50 bln (from about $150 bln in Q3 10) would move Korea’s implied rating to A+/A1/A+.”
KRW is the worst EM performer on the day, down 1.25% vs. USD. Despite the ongoing tensions with Pyongyang, KRW had before today basically recouped its North Korea-related losses. However, policy uncertainty and the possibility of further capital controls warrants caution for now on the won. Levels to look out for in USD/KRW are 1164 (late November highs) and then 1172.50 (high from the North Korean attack November 24). There is also a trendline in place drawn off the November 5 lows that has worked well, coming in today around 1140 which is also today’s low. Korea fundamentals are good, but we think the won is likely to continue underperforming near-term, especially as the situation with North Korea remains unsettled.