SOUTH KOREA'S won is stuck in a downdraft that will take time to break, raising economic anxieties in the country and the likelihood that the central bank will increase interest rates again this month, analysts say.
The won declined nearly 20% against the U.S. dollar this year because of greater spending on imports due to higher oil and other commodity prices. More pressure came as major foreign investors exited South Korea's stock market, selling won-denominated holdings to help cover losses tied to the U.S. credit crunch.
Another reason: The unwinding of banks' external debt, led by the retreat of hedges made by South Korean shipbuilders over the past few years when the won appreciated sharply. The hedging activity, done because manufacturers take orders three to four years before a ship is built, tends to exaggerate swings in the won's value because of the size of the industry relative to the country's economy. South Korea is home to four of the world's five largest shipbuilding companies.
Now, the economy is being squeezed by rising import prices and a reduced ability to pay for them. In a report issued Thursday, economists at Merrill Lynch cited that pinch as a key reason for lowering their forecasts for South Korea's economic growth this year to 4.3%, from 4.5%, and to 3.8% next year, from 4.2%.
Many of these same forces had already made the won one of the few major currencies to decline against the U.S. dollar earlier this year. But as the dollar began to strengthen against most currencies in July, the won's decline became more pronounced -- down 12% since early August.
That has raised further concerns among South Koreans, already hit by rising food and energy prices and worries that steep downturns in U.S. and Europe will hurt demand for the products they export.
Repeated attempts by government officials to talk up the won and by the Bank of Korea to prop it up by selling U.S. dollars have slowed -- but not stopped -- its downward trajectory. Currency traders believe the central bank intervened in the currency market Wednesday and Thursday. The central bank is believed to have sold $2 billion Wednesday.
The central bank's foreign-exchange reserves fell about $10 billion to $247.5 billion in July, when it intervened several times in the currency market. It stepped in less often in August, when its reserves dropped another $4 billion.
While reducing reserves is inherently risky, the central bank's reserves are eight times greater than they were when the country underwent a financial crisis 11 years ago. Also, South Korea's short-term external debt of about $170 billion was 71% of its reserves at the end of August, leaving it plenty to use in the currency market.
In a meeting with reporters earlier this week, Shin Je-yoon, a deputy finance minister, said the government's policy is to intervene only temporarily and without aiming to hit a target rate. 'We respect the fundamentals of the currency market,' he said. 'If there is speculation in one direction, then we intervene to smooth the one-way expectation.'
Last month, the Bank of Korea raised interest rates for the first time in a year -- despite high inflation -- to reinforce its strong-won bias. With the won weaker now, a growing number of analysts believe the central bank's policy makers will raise rates again when they meet next week.
In their report Thursday, the Merrill Lynch economists forecast increases of 0.25 percentage point in each of their next three meetings, lifting the South Korean base rate to 6% by mid-November from 5.25% today.
'Pressure for the currency to go down is going to be with us for some time,' says Fred Neumann, an economist at HSBC in Hong Kong. 'That means by extension there's a risk the BOK is going to hike rates because they don't want to use reserves' to keep intervening by selling dollars.
The won's performance this year is a sharp turnabout from 2005 to 2007, when it rose 35% against the U.S. dollar, more than any other Asian currency. Since reaching a peak of 915 won per U.S. dollar last October, the won has lost 23% of its value.
In late Asian trade Thursday, the won was at 1,128.65 per dollar, a bit stronger than Wednesday when it reached a four-year intraday low of 1,158.70.
For South Korean manufacturers and exporters, the lower value of the won makes their products less expensive compared with those from other countries, helping their bottom line. Samsung Electronics Co., the nation's largest company by revenue, said its second-quarter net income of $2.1 billion included a currency gain of several hundred million dollars.
Evan Ramstad / Sungha Park |
|
