South Korea unveiled on Tuesday a long-anticipated restriction on sales of bonds denominated in foreign currency but intended to raise won funds in the latest move to contain the build-up of foreign debts in Asia's fourth-largest economy.
The Bank of Korea said in a statement it would ban banks and other institutional investors from investing in such bonds from next week. The ban will take effect from July 25 but will not apply to existing holdings.
"This is aimed at supplementing existing measures adopted to regulate excessive foreign borrowings," Kim Han-soo, head of the central bank's international planning and co-ordination team, told reporters. The latest steps followed a series of capital controls that South Korea has imposed since last year on concerns a sudden reversal in capital inflows could cause a severe dollar funding squeeze.
Estimated outstanding foreign-currency bonds issued here had risen to $17.05 billion by the end of June from $14.97 billion as of the end of last year. The bank did not give a separate estimate of the amount sold to raise won funds.
Issuers are required to declare whether they will use the proceeds in foreign currency or in won. Analysts said the new measure was largely in line with what authorities had pledged and therefore would have little direct impact on the foreign currency markets.
"I understand the authorities are taking this step as a precautionary move before the global credit market situation turns worse," said Jeong My-yeong, a foreign exchange strategist at Samsung Futures Co.
South Korean policymakers have frequently warned of restrictions on so-called "kimchi bond" issuances in a bid to curb rising foreign debts. The bonds are supposed to help companies finance demand for foreign currency funds but an increasing amount have been issued to secure won funds.
To invest in such bonds, banks and other financial institutions usually borrow dollars from abroad over the short term, adding to already heavy short-term foreign debt that eventually falls on the country's official debt.
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