South Korea will take “stern action” to stem the won’s decline and fears that the nation is facing a financial crisis are “groundless,” South Korean Vice Finance Minister Kim Dong-soo said.
South Korea’s won weakened to its lowest level since 2004 as importers bought dollars on speculation authorities will fail to halt declines in the currency. Moody’s Investors Service said South Korea won’t face a repeat of 1997, when the nation was forced to turn to the International Monetary Fund for a US$57 billion bailout and the currency lost about half of its value.
South Korea’s currency fell 1.6 percent to 1,135.75 against the dollar as of the 3pm close in Seoul, according to Seoul Money Brokerage Services Ltd. The decline extended this year’s loss to 17.7 percent, the worst among the 10 most-active Asian currencies outside of Japan. Authorities have spent billions of dollars in reserves attempting to shore up the won after its drop stoked the fastest inflation in 10 years, threatening the economy’s expansion.
“The government is deeply worried about the won’s drop, which has moved beyond fundamental reasons,” said Kim, who chaired an emergency meeting on markets in Gwacheon yesterday.
“Investors should have no doubt about our ability to counter the movement,” Kim said. “The rumor about a crisis is groundless, but we plan to strengthen monitoring in case external conditions deteriorate quickly.”
Pictet Asset Management Ltd and Aberdeen Asset Management Plc are betting authorities will lose the battle to stem the won’s drop. The nation’s foreign-exchange reserves fell for a fifth month last month to US$243.2 billion.
The slump in reserves “weakens the hand” of the central bank, said Ting Wee-ming, head of Asian fixed income in Singapore for Pictet, part of Switzerland’s largest privately held bank for the wealthy.
“We are short the won,” he said, referring to positions that profit from further declines.
The Korean won declined more than 7 percent last month, the biggest monthly drop since the Asian financial crisis a decade ago drove the nation to the brink of default.
Reserves plunged to US$7.3 billion in November 1997 as the government made an unsuccessful attempt to prop up the won after an exodus of foreign investors triggered by the collapse in the Thai baht.
The government was forced to turn to the IMF for loans to help businesses repay overseas debt.
South Korea has amassed foreign currency since the region’s crisis and is now the world’s sixth-largest holder of reserves.
“Korean corporations and banks are much healthier than they were before the 1997 crisis,” said Thomas Byrne, who helps determine Moody’s sovereign credit ratings for Asia and the Middle East.
Still, a surge in South Korea’s overseas borrowings and “heavy dependence of Korean banks on funding from the global capital market posed some degree of vulnerability,” Byrne said.
External borrowings that mature in a year almost tripled to US$175.65 billion as of June 30 from US$65.9 billion at the end of 2005, official figures show. Of the total, US$6.7 billion in government bonds held by foreigners is set to mature this month.
Offshore investors sold a record 25 trillion won (US$22 billion) more Korean shares than they bought this year, stock exchange data shows.
The US$970 billion economy grew 4.8 percent in the second quarter from a year earlier, the weakest pace in more than a year. South Korea posted the largest current-account deficit in six months in July as the nation’s imports increased.
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