Korea Says No Plan to Curb Record Foreigner Bond Buying
South Korea, which suffered a sudden outflow of capital in 2008, has no plans to curb record purchases of its debt by foreign funds and will sell 30-year bonds aimed at such investors, a finance ministry official said.
The level of foreign investment is “manageable” and no curbs are planned, Shin Hyung Chul, director general of the treasury bureau at the Ministry of Strategy and Finance, said in an April 5 interview in Gwacheon, south of Seoul. The government will “gradually increase” issuance of securities maturing in a decade or more to stabilize fundraising, he said.
“Foreign investors, especially insurers, have shown keen interest in the 30-year notes, and we expect the sale to be done smoothly,” Shin said. “Overseas central banks including Norway and Switzerland have entered the South Korean debt market recently, and these moves reflect their positive views on the Korean economy.”
Overseas funds raised holdings of the nation’s bonds to a record 88.5 trillion won ($78 billion) last month, the Financial Supervisory Service said on April 4. The ministry plans to sell 30-year debt from September, raising 400 billion won each month, the government said in January.
The won fell 26 percent in 2008 when the subprime mortgage crisis shook financial markets, the worst performer among Asian currencies. Overseas funds sold a net 43.2 trillion won of South Korean stocks in 2008, while cutting holdings of the nation’s debt by 991 billion won, government data show. The won will gain 5.3 percent by year-end to 1,080 per dollar, according to the median forecast in a Bloomberg News survey.
“Foreigners’ investment pattern in Korean bonds had been short-term focused, targeting interest-rate differences, but this seems to be changing with more long-term funds entering the market,” said Kong Dong Rak, a Seoul-based fixed-income analyst at Taurus Investment & Securities Co. in Seoul.
Authorities are concerned about capital flows as they can reverse abruptly, and are considering whether the measures imposed so far are sufficient, Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Plc, wrote last month in a note to clients. In January 2011, the government revived a tax of as much as 14 percent on interest income from treasury bonds held by foreigners, as well as a 20 percent levy on capital gains from their sale.
Three-year government bond yields rose 20 basis points this year to 3.51 percent as of 11:55 a.m. in Seoul on April 9, according to prices from Korea Exchange Inc. Shin forecast yields won’t rise much more in 2012 as the Federal Reserve pledged to keep borrowing costs low throughout 2014, which will help keep Korean rates down.
“Compared with countries that have a similar credit rating, South Korea has higher yields and stable government finances,” said Shin, 52, who worked at the treasury bureau for nearly 10 years in his 28-year career in government. “The new issuance of longer-dated bonds shows faith in South Korea’s economy.”
Moody’s Investors Service raised South Korea’s credit rating outlook this month to positive from stable, citing “very strong and improving fiscal fundamentals.” The rating remains at A1, its fifth-highest grade. The economy, which grew the least in two years in the last three months of 2011, may have bottomed last quarter and will return to a recovery path this quarter, Finance Minister Bahk Jae Wan said on April 4.
Foreign investors held 17.8 percent of government debt as of end-2011, compared with 8.4 percent in 2008, according to a finance ministry statement in January. Funds based in the U.S. were the biggest net investors in won bonds last month, followed by those in France and Norway, data from the financial regulator show. South Korea asked other central banks to hold discussions on purchases of each others’ assets, he said.
The finance ministry expects the spread between 20- and 30- year notes to be similar “or slightly wider” than that between 10- and 20-year securities, Shin said. Benchmark 10-year notes yielded 3.91 percent today, compared with 3.98 for 20-year securities, Korea Exchange Inc. prices show.
Details of the new bond sale will be released on July, according to Shin. Three- and five-year notes accounted for 57.1 percent of government debt issuance last year, a finance ministry statement showed on January.
The ministry plans to issue more inflation-linked bonds this year than in 2011 should investors demand more, Shin said. The government sold 700 billion won of inflation linkers during the first quarter and about 1 trillion won of the debt in 2011, he said. Consumer prices rose 2.6 percent in March from a year earlier, the slowest pace in 20 months, after hitting a near three-year high of 4.7 percent in August.
The finance ministry also plans to sell a 10 percent stake in the Industrial Bank of Korea this year and is looking at market conditions to decide the timing of the sale, Shin said.