Won May Stop Decline After 11% Drop, BOK's Rhee Says

By Kim Kyoungwha

July 2 (Bloomberg) -- South Korea's won, Asia's worst- performing currency after the Thai baht, may stop falling because the nation's current-account deficit will narrow, Bank of Korea Deputy Governor Rhee Gwang-Ju said.

The deficit, the broadest measure of international trade, will shrink to $2.5 billion in the second half from $6.5 billion in the first six months, Rhee, the central bank's head of international affairs, said in an interview yesterday. There is a ``misperception'' of the risks posed to Asia's fourth-biggest economy by an increase in overseas debt, he said.

``There will be no convincing reasons that the won will depreciate further,'' said Rhee, 57. ``The won has depreciated since early March but the trend is not likely to continue for the rest of the year.''

The won, which weakened 11 percent this year, will climb 5 percent to 995 per dollar by Dec. 31, according to the median estimate of 24 strategists surveyed by Bloomberg News. The currency fell as record oil prices quickened inflation to a decade-high of 5.5 percent in June from 3.6 percent in December. The drop is the biggest since the six months ended March 31, 2001. Only the baht's 12 percent slide has been steeper in the region.

The won fell 0.3 percent to 1,050.05 as of 9:40 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. South Korea bought about $7 billion worth of won since the end of May to boost the value of the currency and slow inflation, JoongAng Ilbo newspaper reported yesterday. Rhee declined to comment on intervention or interest-rate policies.

This year's decline in Asian currencies doesn't signal a repeat of the 1997 financial crisis, Rhee said.

No Contagion Risk

In 1997, South Korea's currency reserves plunged by $20.5 billion as the government made an unsuccessful attempt to prop up the exchange rate after an exodus of foreign investors triggered by the collapse in Thailand's baht. The government was forced to turn to the International Monetary Fund for $57 billion of loans to help businesses repay overseas debt. The won slumped 46 percent in the final three months of the year.

``Until now, I don't see the contagion risk,'' Rhee said. ``The situation has changed very much in the region.''

JPMorgan Chase & Co., which correctly forecast the slump in the won, predicts the currency will gain to 1,020 by the end of the year before resuming its decline next year.

``South Korea has many small risks,'' said Lim Jiwon, an economist in Seoul at JPMorgan. While investors are asking about the risk of a regional currency collapse, the possibility is ``quite low,'' she said.

The IMF urged Korea last week to increase monitoring of external debt, which doubled to $412.5 billion on March 31, from $201 billion two years ago, according to central bank data. Debt maturing within a year was equivalent to 82 percent of the nation's reserves, approaching the 89 percent level in 1999.

External Debt

The increase in short-term debt was mainly caused by exporters' locking in dollar rates for their overseas earnings and Korean mutual funds and life insurers hedging investments in overseas stocks, Rhee said. Korean banks, which provided the services, borrowed dollars to limit their risks, he said.

``I'm concerned about the misperception of risk,'' Rhee said, adding that hedging activities will stabilize. ``There will be no problem to repay debt.''

South Korea had $258.1 billion of foreign-exchange reserves on June 30, the world's sixth-largest, compared with $7.3 billion in November 1997. South Korea has since broken up business groups known as chaebol that used overseas bank loans to fund unprofitable global projects.

Central bankers in Asia now meet on a regular basis and will provide funds to each other when needed, Rhee said. Asian governments agreed to lend each other money at favorable terms to support exchange rates in Chiang Mai, Thailand, in 2000.

Export Growth

Exports by Samsung Electronics Co. and Hyundai Motor Co. will help South Korea expand as domestic demand slows, the central bank forecasts. The economy will expand 4.6 percent this year, down from a previous prediction of 4.7 percent and 5 percent in 2007, according to the estimates. Overseas sales will improve the current account in the second half, Rhee said.

``The current-account deficit has shown a seasonal pattern with a deficit in first half and reduced deficit or even a surplus in the second half,'' Rhee said. ``This pattern will continue.''

Rhee said price stability was important to achieve ``sustainable growth.'' The Bank of Korea has kept its benchmark interest rate at a seven-year high of 5 percent to fight inflation.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;
Last Updated: July 1, 2008 21:01 EDT