Political Economist

South Korea sought to lessen the pressure on its rapidly appreciating currency Tuesday by saying it would cut many of the rules that have hindered domestic companies and funds from investing overseas and that have contributed to the won’s rise.

Kwon O-kyu, finance minister, said the rules would be changed so South Korean companies and investors were not at a disadvantage when making portfolio investments or building production facilities overseas. The government is meanwhile preparing to announce new guidelines on foreign investment regulation reforms this month.

“The government is aware of complaints by the business community and prospective investors about existing limitations that effectively tie their hands,” Mr Kwon told reporters Tuesday, signalling that tax rules and “unreasonable” regulations were among those that could be changed. No date for the changes was given.

Manufacturers in Asia’s third largest economy – such as Samsung Electronics and Hyundai Motor – are struggling with the won’s 9 per cent rise against the dollar last year, which is casting a shadow over the export-dependent economy.

“This year, the future for us isn’t that bright,” Lee Kun-hee, the Samsung Group chairman, said in his New Year address. “Instability on the Korean peninsula arising from North Korean nuclear issues, oil prices and the exchange rate will continue haunting South Korea’s economic growth.”

At the same time they are coping with these challenges, South Korean companies and institutions face an array of regulatory challenges to investing abroad.

South Korea has long encouraged companies to invest at home and has placed restrictions on capital movements to try to keep its wealth in the country but, as well as limiting corporate growth, this has led to a mismatch between supply and demand in the foreign exchange markets and has added to upward pressure on the won.

While trying to minimise volatility in the foreign exchange markets and deter investors who may be betting on the won’s continued strength, financial authorities are also trying to engineer a longer-term solution to make the won more liquid and to reduce the capital account surplus.

The finance ministry is making efforts to gradually liberalise foreign exchange markets and make the South Korean won a “global currency”, allowing South Koreans to buy property abroad and foreigners to more readily borrow in won.

The Bank of Korea last month forecast that the stronger currency and slowing exports were likely to drag growth down from 5 per cent last year to 4.4 per cent in 2007. The finance ministry will deliver its revised predictions Wednesday.

The South Korean economy, meanwhile, faces a significant domestic risk from rising house prices.

The closely watched house price index compiled by Kookmin Bank, South Korea’s largest mortgage lender, showed Tuesday that prices rose 1.9 per cent in December, taking the annual rate of increase to 11.6 per cent.

Politicians and policymakers in Seoul, concerned about a looming house price bubble coinciding with a presidential election year, have labelled containing property price rises a key priority for 2007.