Foreign Banks Face Higher Borrowing Costs
Government to Unveil Steps to Curb Short-Term Currency Borrowings Thursday
By Lee Hyo-sik
Staff Reporter
The government will make it costlier for foreign banks operating here to tap short-term loans overseas, a move to contain the flow of more dollars into the country and thereby curb the won's further gains against the dollar.
Finance and Economy Minister Kwon O-kyu said Monday the ministry will unveil a comprehensive package of measures on Thursday to curb short-term foreign currency borrowings, which have contributed to the won's appreciation against the dollar and other currencies.
Among the countermeasures are the increase in costs associated with borrowing dollars from their headquarters abroad. ``The government is considering raising the cost of borrowing short-term foreign currency loans,'' Kwon said at a meeting with heads of economic associations.
The move comes as the won has gained rapidly against the dollar since last year. The won gained nearly 9 percent last year and appreciated another 1.1 percent this year. The government has said that the pace of the won's gains is too fast and will not last long as it is overvalued.
Kwon's remarks mean that the government will not allow the won to strengthen beyond 920 won to the dollar. The won-dollar rate has posted a modest rebound over the past couple of days on stronger verbal intervention by ministry officials, with it hovering above 920.
Recently, financial regulators have said that such investment behavior is destabilizing the local currency market, pledging all-out measures against ``speculative currency trading.''
The government is considering cutting the maximum amount it regards as expenses for tax benefits among foreign currency borrowings to three times their capital from the current six times. If the tax-deductible expense ceiling is cut, foreign banks will have to pay more taxes associated with borrowing and will be discouraged from bringing in loans from abroad, ministry officials said.
Foreign banks operating in the country have a combined capital of 3.7 trillion won, according to NH Investment & Securities. Under the current rule, 22 trillion won worth of borrowings are recognized as tax-free expenses.
But if the maximum amount of expense acknowledgement is cut in half, only 11 trillion won of borrowings will be subject to the benefit and this will in turn cut about 80 billion won from combined earnings, NH Investment said.
``Non-financial foreign businesses here are allowed to borrow from their parent companies abroad up to six times their capitalization without paying taxes.
So, we are considering cutting the maximum amount for foreign bank branches in half to level the playing field for all foreign businesses operating in the country,'' a ministry official said.