South Korea Will Take `Stern Action' to Stem Won Drop

By Seyoon Kim

Sept. 2 (Bloomberg) -- South Korea will take ``stern action'' to stem the won's decline and fears that the nation is facing a financial crisis are ``groundless,'' Vice Finance Minister Kim Dong Soo said.

The won fell 1.6 percent against the dollar to the weakest in four years today, and the stock index dropped to the lowest level since March 2007. 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 $57 billion bailout and the currency lost about half of its value.

South Korea's won has plunged 18 percent this year, Asia's worst performer, as price increases and a slowing economy prompted bond and stock funds to move money out of the country. Authorities have spent billions of dollars in reserves trying to shore up the currency after its drop stoked the fastest inflation in 10 years, threatening the economy's expansion.

``Korea is considered as a global, cyclical economy and as the world economies are teetering towards a recession scenario, that causes concern for investors,'' said Khiem Do, who helps oversee about $11 billion of Asian equities at Baring Asset Management (Asia) Ltd. in Hong Kong. ``We have been underweight Korea in our regional funds. If it gets cheap enough, we'll be attracted to go back in again.''

The won weakened to 1,133.75 versus the dollar at 3 p.m. in Seoul. The Kospi index fell 0.5 percent to 1,407.14 after plunging 4.1 percent yesterday.

`Deeply Worried'

``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 today. ``Investors should have no doubt about our ability to counter the movement.''

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 in August to $243.2 billion.

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 nation's currency declined more than 7 percent in August, the biggest monthly drop since the Asian financial crisis a decade ago drove the nation to the brink of default.

``The rumor about a crisis is groundless, but we plan to strengthen monitoring in case external conditions deteriorate quickly,'' Vice Minister Kim said.

1997 Crisis

Reserves plunged to $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 $175.65 billion as of June 30 from $65.9 billion at the end of 2005, official figures show. Of the total, $6.7 billion in government bonds held by foreigners is set to mature this month.

Overseas Investors

Foreigners turned to net sellers of Korean bonds in June and July for the first time this year, raising concern of further capital outflows as more government debt matures.

``We have already acquired money to pay for the government bonds that mature in September so there's no need for an increase in government bond sales for the repayment,'' Deputy Finance Minister Shin Je Yoon told reporters. ``We forecast some of the foreign investment that matures will be reinvested.''

The $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.

``The market is likely to stay volatile for a while,'' said Lee Keon Hak, who manages the equivalent of $450 million at CJ Asset Management Co. in Seoul. ``Concerns about slowing corporate profits and a potential credit squeeze are growing, and stock and currency markets are reflecting that.''

Offshore investors sold a record 25 trillion won ($22 billion) more Korean shares than they bought this year, stock exchange data shows.

To contact the reporter for this story: Seyoon Kim in Seoul at skim7@bloomberg.net