SEOUL :South Korea released policy plans on Thursday to spur foreign inflows for stability in financial markets and boost domestic demand amid weakening consumer confidence, as the economy faces heightened uncertainty from an unprecedented political crisis.
The finance ministry said in economic policy plans for the year ahead that it would permit registered foreign financial institutions to engage in foreign exchange trading for current transactions, including export and import settlements, from mid-January.
South Korea has been gradually implementing measures to widen the use of the won in global markets and allowed foreign institutions to trade the won onshore directly using the domestic interbank system from last year.
Allowing Registered Financial Institutions, or RFI, to facilitate foreign exchange deals for trade settlement purposes would be expanding their business scope as they can currently trade the won only for securities trading such as stocks and bonds.
The initiative is a step toward enabling investors to trade the won more freely after the government extended trading hours for the onshore won and foreign exchange swap markets to 2 a.m. (1700 GMT) from July, the closing of London business hours.
“This means that RFIs are now able to conduct virtually all areas of foreign exchange trading to meet actual demand,” finance ministry director You Chang-yeon said.
The ministry also said it would deploy contingency plans to stabilise financial markets if needed, and vowed to closely cooperate with major countries abroad to ease volatility.
South Korea’s KOSPI stock market and won currency were the worst-performers in Asia last year, with declines of 10 per cent and 13 per cent, respectively, as political turmoil took its toll on investor sentiment.
HIGH UNCERTAINTY
Asia’s fourth-largest economy is battling a deepening political crisis after its president briefly imposed martial law in December, which provoked public outrage and led to his impeachment.
The government hopes a fresh inflow of investments this year will boost financial markets at a time when the economy’s taxpaying population is shrinking due to the world’s lowest fertility rate and as robust export growth is threatened by a global trade war.
For 2025, the government expects the economy to expand by 1.8 per cent, weaker than the potential growth rate of 2 per cent estimated by the central bank, after growing 2.1 per cent in 2024. It sees inflation at 1.8 per cent this year, slightly below the central bank’s target of 2 per cent.
“In 2025, there is a possibility that economic growth, financial markets and people’s livelihoods will be significantly affected by external and internal uncertainty that is higher than ever before,” the ministry said.
The government will front-load its budget spending in the first half of the year and loosen regulations to speed it up, the ministry said, adding it will seek additional measures to boost the economy if deemed necessary after reassessing economic conditions in the first quarter.
With this year’s fiscal spending slashed by the opposition-controlled parliament, economists expect the government will draft a supplementary budget from as early as the first quarter, but the government said on Thursday that was not under consideration for now.
To support consumer confidence that has weakened to a more than two-year low, the ministry said it would introduce expanded tax exemptions on spending during the first half of the year, lower taxes on automobile purchases by 30 per cent and prepare tax incentives for firms raising employee wages.
On Thursday, the country’s central bank also said it would lower interest rates flexibly this year amid the heightened political and economic uncertainty.
