By Yoon Ja-young
Having a huge amount of dollars is not always good when it comes to the national economy.
As the huge current account surplus is hurting exporters, the government is pondering ways to pull out the dollars, encouraging overseas investment.
“The current account surplus is increasing continuously. We need some efforts to decrease it,” Strategy and Finance Minister Choi Kyung-hwan recently told reporters.
He said that the government will promote overseas investment.
The government is pondering diverse options to increase overseas investment, including deregulation for investors and tax incentives. Overseas stock investment by individuals and pension funds as well as corporate mergers and acquisitions of foreign companies are among them.
Lim Hyung-joon, a research fellow at the Korea Institute of Finance, pointed out that the government has much room to increase overseas investment by individual investors.
“While the overseas stocks held by 18 major OECD member countries stood at on average 45.8 percent of their GDP, and their overseas bonds at 56.3 percent of GDP, the ratio for Korea stood at mere 9.5 percent for stocks and 3.5 percent for bonds as of 2013. The overseas investment has huge room for an increase,” Lim said.
He added that the government may consider revising taxation on overseas stock investment which falls behind global standards. Currently, Koreans who invest in foreign stocks are levied taxes for not only the gains from stock investment but also for gains from foreign exchange rate change. Experts have pointed out that this is absurd as the investor may be levied taxes even in cases of investment loss.
“We are currently considering comprehensive measures to promote overseas investment. However, no concrete measures have been determined as of yet,” the ministry said in a media release.
Experts say that promoting overseas investment is the most plausible way to deal with the huge current account surplus and appreciation of the Korean won.
According to the central bank, the country’s current account surplus stood at $10.4 billion in March, up 41.9 percent from a year ago. This year’s current account surplus is expected to be $96 billion, the biggest ever.
The economists are concerned over the quality of the surplus ― it is mostly caused by plunging import amid sluggish domestic consumption. The export of goods fell 8.4 percent in March from a year ago, but the import plunged further by 16.8 percent. The balance of goods thus ended up with an $11.2 billion surplus, the biggest ever.
Such a recession-triggered surplus is worrisome as it hampers the normal mechanism of the foreign exchange rate. A surplus is supposed to strengthen the Korean won, increasing imports and then bringing the current account back to balance and weakening the Korean won. However, the imports are not increasing despite the strong won due to the sluggish domestic economy. The current account surplus continues to further strengthen the Korean won, only hurting the exporters. The Korean won appreciated by 2.8 percent this year, which compares with 0.5 percent appreciation of the Japanese yen. Korean firms are complaining that they are losing price competitiveness against Japanese rivals due to the strong Korean won.
Choe Mun-bak, a researcher at LG Economic Research Institute, points to the massive overseas investment by the Japanese.
“While foreigners’ investment in Japanese stocks and bonds amounted to 5 trillion yen this year, the Japanese’ investment overseas was much bigger at 10 trillion yen,” he said, adding that Japan has become the biggest investor in U.S. treasury bonds, on top of increasing SOC investment in Southeast Asia.
He said that the investment is likely to increase when considering further quantitative easing expected this year. “The investment is leading to capital outflow, prompting the yen to further weaken,” he added.