(Bloomberg) -- South Korea’s new measures to boost foreign currency inflows are tinker-at-the-margins tweaks that will breed short-term stability while exposing the need for more fundamental policy changes, analysts say.
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Among the rules introduced Sunday to boost investor interest include raising FX derivatives’ hedging limits, allowing domestic institutions to buy foreign currency-denominated “Kimchi” bonds, and streamlining foreigners’ tax paperwork.
They come at a time when Koreans are losing confidence in local markets and increasingly investing abroad, while foreign investors’ demand also remains tepid. Koreans’ investment position abroad hit a record $1.1 trillion in 2024 on a net basis, Bank of Korea data shows. Authorities’ latest initiatives reflect their urgency to reverse some of the trends.
“The measure could provide a psychological safety net for market participants and contribute to market stability,” said Chanhee Kim, senior analyst at Shinhan Securities. “But it won’t change the direction of the flow itself.”
In previewing the changes, the Finance Ministry said in a statement last week that the measures were being prepared to address an “imbalance” in local foreign currency supply and demand.
The won was Asia’s worst performing currency in 2024, shedding more than 12% against the dollar. With foreigners cutting stock holdings, the benchmark index Kospi also fell 9.6% for the year.
The measures have incentives to woo foreigners, but some are meant to nudge Koreans to think harder about investing locally, particularly in stocks. One change raises the proportion for local stocks in an individual savings account vehicle. Another enables exporters to borrow money from banks in foreign currency to use in domestic facilities.
The changes may not improve the imbalance cited by the government, said Min Gyeong-won, an economist at Woori Bank in Seoul, citing a need for better industrial and corporate support policies to attract more foreign investments.
Moon Hong-Cheol, a fixed-income and FX strategist at DB Financial Investment, echoed the sentiment. The measures to counter the won’s weakening will have limited impact without changes in the “fundamental economic structure,” he said.