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South Korea's aspirations for a global index are revived by its proposed bond tax reductions

Image: Reuters Berita 24 English -South Korea's plan to abolish the tax on foreign investment in its bond market may be interpreted as a...

Image: Reuters

Berita 24 English -South Korea's plan to abolish the tax on foreign investment in its bond market may be interpreted as a step to curb capital outflows as well as a longer-term objective of being included in global bond indexes.

Finance Minister Choo Kyung-ho announced the idea to exclude foreigners from paying taxes on income they get from the country's treasury bonds on Sunday.

The remark comes as worries about capital outflows from won assets are stoked as interest rates in South Korea appear on track to drop below U.S. rates for the first time since early 2020. Plans for the yearly tax code change, which the finance ministry is likely to release this week, may confirm it.

South Korea taxes foreigners who invest in bonds at a rate that ranges from 0% to 15% of their interest income in accordance with agreements with their country of residency.

Seoul has long aimed to create the FTSE World Government Bond Index (WGBI), which would draw billions of dollars from index-following fund managers.

South Korea is classified in the second-highest level of market accessibility, despite the fact that a country must have the highest level to be included in the WGBI.

According to a representative of the finance ministry, taxes on interest income have been the biggest deterrent for foreign investors from purchasing South Korean bonds. Although other concerns, such our foreign exchange regulations, have been raised throughout our discussions with FTSE regarding potential inclusion, this has been the most significant one.

Bond market analysts claim that South Korea meets WGBI's standards for market size and credit rating. Investments in bonds made by non-residents are not taxed in China, Japan, Australia, or any of the other countries in the index.

An employee of a foreign bank's Seoul branch made the forecast that there will be a big rise in active investment after the levy is eliminated.

For many people who desire to invest in the Korean government bond market, taxes have been a significant hardship, according to the author. As sovereign investors make up the majority of those who are now exempt from this tax.


Due to the U.S. Federal Reserve's aggressive drive to raise interest rates, foreign investors have started withdrawing money from emerging economies. With a net total withdrawal of $5.08 billion from bonds issued by the governments of Indonesia, Thailand, Malaysia, South Korea, and India, last month saw the highest monthly outflow in the previous three months.

Foreigners owned South Korean bonds worth 228.9 trillion won ($174.1 billion) at the end of the previous month. Compared to a total of 64.54 trillion won in 2021, they have invested 8.38 trillion won so far this year.

According to data from the Financial Supervisory Service, foreigners' net holdings of local won bonds decreased in June for the first time in more than a year.

With losses versus the dollar exceeding 9% this year, the won is the weakest currency in emerging-market Asia.

The average yield on 10-year Korean treasury bonds in 2021 was 2.067%, which was much higher than the average rates on bonds with comparable ratings in the United Kingdom or France, which were 0.739% or 0.010%, respectively.

Announcing the new administration's economic initiatives, the finance ministry stated last month that it will develop medium- and long-term plans to improve bond market supporting features by the end of this year in order to attract more foreign investments. One of them was getting a WGBI membership.

According to a representative of the finance ministry, one of the government's initiatives to bring the bond market into compliance with global standards is to exempt foreigners from paying taxes.

"The local bond market was relatively appealing throughout the COVID-19 period, but foreign investment in terms of market size was remained modest, with taxes being a key hurdle."

The inclusion of South Korean treasury bonds in the WGBI may result in an influx of up to $50.55 billion into the local bond market over the course of the next 18 to 24 months, according to local brokerage KB Securities.

($1 = 1,315.0500 won)

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