Pictet, Aberdeen Sell Korean Won as BOK Fights Drop

By Kim Kyoungwha

Sept. 1 (Bloomberg) -- Pictet Asset Management Ltd. and Aberdeen Asset Management Plc are betting the Bank of Korea will lose the battle to stem the won's drop, thwarting its attempt to curb the fastest inflation in a decade.

The won slumped as much as 3.2 percent against the dollar today, after a 7 percent drop in August, as price increases and a slowing economy prompted bond and stock funds to move money out of the country. Foreign-exchange reserves fell by $16.7 billion in the four months through July as the central bank's won-buying failed to halt the slide. The government is ``seriously concerned'' about the decline, said Choi Jong Ku, the finance ministry's top currency official.

The slump in reserves ``weakens the hand'' of the central bank, said Wee-Ming Ting, 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 drop surprised strategists, who predicted at the start of the year that the won would climb 5 percent to 890 per dollar, according to a Bloomberg News survey of 22 estimates. The won, which fell 2.5 percent to 1,116 a dollar as of the 3 p.m. close in Seoul, is weaker than the median year-end forecast of 1049. Last month's depreciation was the steepest since 1998, during the Asian financial crisis.

``The government is seriously concerned about the excessive won decline,'' the ministry's Choi said in a statement today. ``We will take necessary steps if the decline continues.''

Stock, Bond Sales

Consumer prices in Asia's fourth-largest economy grew 4.7 percent during the first eight months, the fastest since 1998, increasing pressure on the central bank to raise its benchmark rate from an eight-year high of 5.25 percent. Confidence among consumers in July was the lowest since 2000 and spending by households, saddled with record debt, fell in the second quarter for the first time in four years.

International investors sold a record 25 trillion won ($22 billion) more Korean shares than they bought this year, stock exchange data shows. The Kospi stock index fell 25 percent.

Net sales of the nation's bonds totaled $4.2 billion in June and July, snapping a two-year run of monthly purchases, according to central bank figures. Benchmark five-year yields climbed 103 basis points, or 1.03 percentage points, in the past four months to 5.99 percent.

Including dollar sales in the forwards market, the Bank of Korea has spent about $43.7 billion supporting the won this year, according to Richard Yetsenga, a strategist in Hong Kong with HSBC Holdings Plc.

Finance Minister Kang Man Soo today said the government had tried to stabilize the won's ``drastic'' decline and Goldman Sachs Group Inc. predicts the government will have some success, forecasting an exchange rate of 1,040 in three months.

`One-Way Bet'

The won is ``not a one-way bet,'' said Goohoon Kwon, a Seoul-based economist with Goldman, the world's biggest securities firm. Policy makers could raise rates, helping attract funds seeking higher returns, he said.

Aberdeen Asset, Scotland's largest independent money manager, is betting the Bank of Korea will fail, forecasting the won will be as weak as 1,200 per dollar in a year's time.

``We have been short the won and are generally negative over the next three to six months,'' said Anthony Michael, who oversees the equivalent of $3.7 billion of Asian assets as the firm's regional head of fixed income in Singapore. ``Growth in Korea is going to slow substantially.''

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. 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.

Overseas Borrowings

An increase in South Korea's overseas borrowings is also driving funds out of the country, said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong.

Short-term overseas debt, external borrowings that mature in a year, almost tripled to $175.65 billion as of June 30 from $65.9 billion at the end of 2005, official figures show.

The increase was mainly caused by exporters' locking in dollar rates for overseas earnings, Bank of Korea Deputy Governor Rhee Gwang-Ju said in a July interview. This year's decline in Asian currencies doesn't signal a repeat of the financial crisis a decade ago because central banks have more reserves, he said.

``Potential difficulties with rolling over the debt may lead to a sharp drawdown of reserves and pressure on the won,'' said Dariusz Kowalczyk, a strategist with CFC Seymour Ltd. in Hong Kong, who has the most bearish estimate in the survey. He predicts the won will end the year at 1,200 per dollar.

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