Korea Currency Swap Rates to Fall to 5-Month Low, Samsung Says

By Kim Kyoungwha

Sept. 25 (Bloomberg) -- South Korea's currency swap rates will fall to a five-month low as banks rolling over foreign debt underpin demand for dollars, said Choi Seok Won, head of fixed income research at Samsung Securities Co.

``Demand for dollars in the swap market outweighs supply as the global credit crunch is worsening the funding situation for local banks trying to pay off debt,'' Choi said in an interview. ``Unless foreign investors buy local debt en masse and supply much-needed cash, the shortage isn't likely to ease any time soon.''

The volume of overseas borrowings set to mature in a year or less tripled to $175.65 billion in June from $65.9 billion at end of 2005, rocking foreign investor confidence in Asia's fourth largest economy. In a reflection of the concern, the won has tumbled 20 percent this year versus the dollar.

One-year swap rates may decline to 2 percent, the lowest since April 24, Seoul-based Choi said. The rate, which was at 2.74 percent as of 1 p.m. in Seoul, has shed 0.95 percentage point from a two-month high of 3.72 on Sept. 9, according to Bloomberg data.

A currency swap is a foreign exchange agreement in which investors pay or receive a variable interest rate in a one currency in exchange for a fixed swap rate in another currency to hedge or bet on interest rate moves in two different countries. In Korea, local participants typically pay a fixed rate in won in exchange for a floating rate in dollars. Heavy demand to receive the floating dollar rate has pushed it lower recently.

Swap Lines

The Korean government, in an effort to calm the market, will use its foreign-exchange stabilization fund of $55 billion to provide dollars in the local won-dollar swap market as early as this week, JoongAng Ilbo reported, citing an unidentified finance ministry official.

``The release of reserves may provide a good temporary boost but this can't be an ultimate solution to the problem,'' Choi said. ``Like some central banks that have opened a swap line with the Federal Reserve, if the Bank of Korea uses that channel it might improve the situation.''

The Fed arranged to funnel $30 billion into the global financial system by opening swap lines with four central banks in Australia, Denmark, Norway and Sweden to relieve shortages of dollars in markets worldwide. They set up the currency exchange to address ``elevated pressures'' in dollar funding, the Board of Governors said yesterday in a statement.

That move came after the Fed, the ECB and the Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada last week to pump hundreds of billions of dollars into the financial system.

Funding Problems

Funding difficulties may worsen as a deepening global downturn damps demand for Korean-made laptops, mobile phones and flat-screen televisions. The trade balance, which swung to a deficit in December for the first time in five years, recorded a shortfall of $3.23 billion in August.

South Korea may keep posting trade deficits as the financial turmoil in the U.S. weakens demand for its exports, the main engine of the country's economic growth, said Rim Che Min, vice minister at the Ministry of Knowledge Economy.

``We're concerned that financial turmoil may affect real economic activities such as investment, consumption and exports,'' he said in an e-mailed statement today. ``I'm worried that trade deficits may continue.''

The $970 billion economy expanded 4.8 percent in the second quarter from a year earlier, the slowest since the first three months of 2007, when it grew 4 percent.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;