South Korea Won Falls as UBS, ABN Say Outflows Will Accelerate

By Kim Kyoungwha and William Sim

Sept. 3 (Bloomberg) -- South Korea's won, Asia's worst- performer this year, weakened to the lowest since 2004 as UBS AG and ABN Amro Bank NV predicted investors will continue selling the currency on expectations that the economy will falter.

The currency slumped for a fourth day as UBS and ABN predicted overseas investors will keep selling the nation's assets as government intervention fails to halt the drop. The economy grew 4.8 percent in the second quarter from a year earlier, the slowest pace in more than a year and the trade balance, which swung to a deficit for the first time in five years, recorded a shortfall of $3.23 billion in August.

``Given that the psychologically important 1,150 barrier was broken through, I can't tell for sure what will be the next line,'' said Chu In Young, a dealer with state-run Korea Development Bank in Seoul. ``Without strong intervention, the won has only one way to go.''

The won dropped 1.3 percent to 1,148.50 per dollar as of the 3 p.m. close in Seoul, from 1,134.00 yesterday, according to Seoul Money Brokerage Services Ltd. The currency weakened to as low as 1,159.05. It will fall to 1,300 for the first time in six years during the next 12 months, Duncan Wooldridge, a Hong Kong- based economist at UBS, Switzerland's biggest bank, wrote in a research note.

The won has slumped 19 percent this year as accelerating inflation and a slowing economy prompted funds including Pictet Asset Management Ltd. and Aberdeen Asset Management Plc to move money out of the country. Consumer prices climbed 4.7 percent during the first eight months from a year earlier.

Lower Forecasts

Investors should bet the won will weaken to 1,200 per dollar this year, the weakest since 2003, according to Irene Cheung, a Singapore-based strategist at ABN Amro.

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 median of forecasts over the past month is still stronger at 1,049.

Moody's Investors Service said yesterday South Korea won't face a repeat of 1997, when the country was forced to turn to the International Monetary Fund for a $57 billion bailout and the currency lost about half of its value.

Currency, bond and stock markets will stabilize as concerns the nation is facing a financial crisis subside, Deputy Minister Shin Je Yoon said today.

``There's no need to worry because the situation is totally different from the 1997 financial crisis,'' Shin told reporters in Gwacheon today.

External Debt

Some investors have been concerned by an increase in the nation's short-term 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.

South Korea's debt levels are in better shape now that they were in 1997, according to Credit Suisse, with corporate net debt-to-equity standing at an estimated 18 percent compared with 218 percent in 1997. Total foreign exchange reserves now exceed short-term external debt by about $72 billion, compared with in 1997 when the short-term external debt was over $40 billion more than the reserves, Credit Suisse said in a note today.

Stocks rose with the Kospi stock index gaining 1.4 percent, to 1,426.89, after heads of brokerages and asset managers called on investors to use the declines to purchase equities.

``The recent decline is excessive relative to domestic economic fundamentals,'' the Korea Securities Dealers Association said in a statement today. ``The stock market should recover and we recommend investors that the declines may provide a buying opportunity.''

Bonds Climb

Five-year government bonds rose for the first time in three days, on speculation yields near the highest in six weeks are attracting investors.

Crude prices near a five-month low are also adding to ``the positive mood'' in the bond market, allaying concerns inflation may accelerate, according to Lee Jai Shin, a fund manager with Good Morning Shinhan Securities Co. in Seoul.

The yield on the 5.25 percent note due March 2013 5 basis points to 5.98 percent, according to Korea Exchange. The price of the security rose 0.21 or 21 won per 10,000 face amount to 99.66. A basis point is 0.01 percentage point.

The Bank of Korea raised its benchmark rate for the first time in a year last month to 5.25 percent, saying that inflation poses a greater threat than slowing economic growth. The bank reviews rates again on Sept. 11.

The central bank may raise interest rates from an eight- year high in September or October as the weakening won fans inflation, Goldman Sachs Group Inc. said, after previously predicting no change. The won's declines could trigger ``an inflation-depreciation spiral if allowed to persist,'' Kwon Goohoon, a Goldman Sachs Group Inc. economist in Seoul wrote in a Sept. 2 report.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net