6. Financial Sector
Capital Markets and Portfolio Investment
The Korea Exchange (KRX) is comprised of a stock exchange, futures market, and stock market following a 2005 merger of the Korea Stock Exchange, Korea Futures Exchange, and Korean Securities Dealers Automated Quotations (KOSDAQ) stock market. It is tracked by the Korea Composite Stock Price Index (KOSPI) and has an effective regulatory system that encourages portfolio investment. There is sufficient liquidity in the market to enter and exit sizeable positions. In 2019, over 2,000 companies were listed with a combined market capitalization of USD 1.4 trillion. The ROK government uses various incentives, such as tax breaks, to facilitate the free flow of financial resources into the product and factor markets. The ROK does not restrict payments and transfers for current international transactions, in accordance with the general obligations of member states under International Monetary Fund (IMF) Article VIII. Credit is allocated on market terms. The private sector has access to a variety of credit instruments, but non-resident foreigners are unable to borrow money in South Korean won, although they can issue bonds in local currency. Foreign portfolio investors enjoy open access to the ROK stock market. Aggregate foreign investment ceilings were abolished in 1998, and foreign investors owned 37.6 percent of benchmark KOSPI stocks and 10.1 percent of the KOSDAQ at the end of 2019. Foreign portfolio investment decreased slightly over the past year, reflecting slowing global growth.
Money and Banking System
Financial sector reforms enacted to increase transparency and promote investor confidence are often cited as one reason for the ROK’s rapid rebound from the 2008 global financial crisis. These reforms aimed to increase transparency and investor confidence and generally purge the sector of moral hazard. Since 1998, the ROK government has recapitalized its banks and non-bank financial institutions, closed or merged weak financial institutions, resolved many non-performing assets, introduced internationally-accepted risk assessment methods and accounting standards for banks, forced depositors and investors to assume appropriate levels of risk, and taken steps to help end the policy-directed lending of the past. These reforms addressed the weak supervision and poor lending practices in the South Korean banking system that helped cause and exacerbate the 1997-98 Asian financial crisis. The ROK banking sector is healthy overall, with a low non-performing loan ratio of 0.77 percent at the end of 2019, dropping 0.2 percent from the prior year. Korean commercial banks held more than USD 3.3 trillion in total assets at the end of 2019. Foreign commercial banks or branches can establish local operations, which would be subject to oversight by ROK financial regulators. The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy. There are no restrictions on a foreigner’s ability to establish a bank account in Korea. The Bank of Korea (BOK) is the central bank.
Foreign Exchange and Remittances
In categories open to investment, foreign exchange banks must be notified in advance of applications for foreign investment. All ROK banks, including branches of foreign banks, are permitted to deal in foreign exchange. In effect, these notifications are pro forma, and approval can be processed within three hours. Applications may be denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns. Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the distribution sector. According to the Foreign Exchange Transaction Act (FETA), transactions that could harm international peace or public order, such as money laundering and gambling, require additional monitoring or screening. Three specific types of transactions are restricted:
- Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;
- The Financial Services Commission will not permit foreign currency borrowing by “non-viable” domestic firms; and
- The ROK government will monitor and ensure that South Korean firms that have extended credit to foreign borrowers collect their debts. The ROK government has retained the authority to re-impose restrictions in the case of severe economic or financial emergency.
Funds associated with any form of investment can be freely converted into any world currency. However, there might be some cost or technical problems in case of conversion into lesser used currencies, due to the relatively small foreign exchange market in the country. In 2019, 69.4 percent of spot transactions in the market were between the U.S. dollar and Korean won, while daily transaction (spot and future) was equal to USD 55.8 billion, up 0.5 percent from the previous year. Exchange rates are generally determined by the market. The U.S. Department of the Treasury assessed that ROK authorities historically had intervened on both sides of the currency market, with a net impact that resisted won appreciation as demonstrated by a sustained rise in reserves and net forward position. In its January 2020 semiannual report to Congress, Treasury assessed that in 2018 and the first half of 2019, ROKG authorities on balance intervened to support the won through small net sales of foreign exchange. Treasury welcomed the ROK’s commitment to increased transparency, while recommending that Korean authorities limit currency intervention to exceptional circumstances. The BOK’s most recent intervention report, released in March 2020 and covering 4Q 2019, showed zero net intervention.
The right to remit profits is granted at the time of original investment approval. Banks control the now pro forma approval process for FETA-defined open sectors. For conditionally or partially restricted investments (as defined by the FETA), the relevant ministry must provide approval for both investment and remittance. When foreign investment royalties or other payments are proposed as part of a technology licensing agreement, the agreement and the projected stream of royalties must be approved by either a bank or MOEF. Approval is virtually automatic. An investor wishing to enact a remittance must present an audited financial statement to a bank to substantiate the payment. The ROK routinely permits the repatriation of funds but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows might harm the balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of domestic financial markets. To withdraw capital, a stock valuation report issued by a recognized securities company or the ROK appraisal board also must be presented. Foreign companies seeking to remit funds from investments in restricted sectors must first seek ministerial and bank approval, after demonstrating the legal source of the funds and proving that relevant taxes have been paid. There are no time limitations on remittances.
Sovereign Wealth Funds
The Korea Investment Corporation (KIC) is a wholly government-owned sovereign wealth fund established in July 2005 under the KIC Act. KIC’s steering committee is comprised of KIC’s Chief Executive Officer, the Minister of Economy and Finance, the Bank of Korea (BOK) Governor, and six private sector members appointed by the ROK President. KIC is on the Public Institutions Management Act (PIMA) list. It is mandated to manage assets entrusted by the ROK government and central bank and generally adopts a passive role as a portfolio investor. Its assets under management stood at USD 131.6 billion at the end of 2018. KIC is required by law to publish an annual report, submit its books to the steering committee for review, and follow all domestic accounting standards and rules. It follows the Santiago Principles and participates in the IMF-hosted International Working Group on Sovereign Wealth Funds. The KIC does not invest in domestic assets, aside from a one-time USD 23 million investment into a domestic real estate fund in January 2015.