By Kim Kyoungwha and Wes Goodman
Oct. 20 (Bloomberg) -- Exporters in emerging markets are hoarding dollars as losses on currency bets worsen the slump in the South Korean won, Brazilian real, Mexican peso and India's rupee.
South Korean phone parts maker KJ Pretech Co. resisted converting dollars to won after record swings in currency markets ruined its trading strategies. In Brazil, Aracruz Celulose SA, a pulp producer, Sadia SA, a poultry company and Grupo Votorantim, a cement maker, had $2.3 billion in losses on hedges intended to protect earnings from exchange-rate moves. India's biggest carmaker, Maruti Suzuki India Ltd., plans to wait for a weaker rupee before bringing profits home from outside the country.
Western Asset Management Co. and Union Investment, which manage more than $800 billion combined, are selling emerging- market currencies as the global economy slows and demand for dollars increases. Zurich-based UBS AG predicts the rupee will weaken 2.2 percent to a record low of 50 per dollar by March, adding to a 19 percent drop this year, while the won will depreciate 6 percent to 1,400, extending a 29 percent slump.
``This is all caught up in the broader trend for the global grab for dollars,'' said Edwin Gutierrez, a money manager who oversees $5.5 billion in debt in London at Aberdeen Asset Management, the Scottish fund company focused on emerging markets. ``Expect more weakness.''
Currency Slump
The won slumped 9.7 percent on Oct. 16, the most since the International Monetary Fund bailed the nation out in 1997. It has gained 5 percent in the past two days to 1,312 as the government mapped out a plan to support banks. The Brazilian real closed at 2.1190 on Oct. 17, bringing its 2008 drop to 16 percent. Mexico's peso ended the week at 12.88 per dollar, for a year-to-date decline of 15 percent. India's rupee fell for a 10th week, to 48.88.
Emerging markets tumbled after Lehman Brothers Holdings Inc. filed for bankruptcy, deepening a freeze in credit markets. Investors turned to the safest, dollar-denominated securities even though the U.S. economy is growing more slowly than those of developing nations and the Federal Reserve's 0.5 percent benchmark interest rate compares with 5 percent in South Korea, 9 percent in India and 13.75 percent in Brazil.
Three-month Treasury bill rates fell to 0.02 percent on Sept. 17, from 1.91 percent in August. The ICE futures exchange's Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, climbed 14 percent since June to 82.41, after falling 5.5 percent in the first half of the year.
Rising Volatility
Rapid moves in exchange rates are perilous for exporters because they can't adjust their hedging strategies fast enough. The JPMorgan Emerging Market Volatility Index soared to a record 32.01 percent on Oct. 10 before ending the week at 25.63. The index never exceeded 15.66 until Lehman's bankruptcy, according to data compiled by Bloomberg.
``It doesn't matter what your fundamentals are,'' said Sergey Dergachev, an emerging-market money manager at Union Investment in Frankfurt, which has $233 billion in assets. ``Investors are trying to get rid of anything that is associated with market risk.''
Central banks and governments around the world are pumping unprecedented amounts of cash into the financial system to combat the credit crisis. The moves are starting to bring down money market interest rates, which may revive demand for higher- yielding assets such as emerging-market currencies.
The three-month London interbank offered rate for dollars fell every day last week, to 4.42 percent from 4.82 percent. The Dow Jones Industrial Average climbed 4.8 percent for its best weekly performance since 2003.
Debt Guarantees
South Korea's government yesterday announced it will grant a three-year guarantee for as much as $100 billion in debts used by the nation's lenders until June 30.
``The Korean won may rise a bit as it helps local banks secure dollars more easily,'' said Seo Chul Soo, a debt strategist in Seoul at Daewoo Securities Co., South Korea's third-biggest brokerage. ``Still, it can't solve the fundamental problem until the global financial market stabilizes.''
Brazilian losses on currency derivatives may reach 60 billion reais ($27 billion), said Paulo Vieira da Cunha, a former central bank director who is now a partner at New York- based hedge fund Tandem Global Partners. Korean companies may lose as much as 3 trillion won ($2.2 billion) on contracts that are only profitable when the currency remains in a narrow range, said Kwon Jae Min, a credit analyst at Standard & Poor's in Hong Kong.
`At a Loss'
Taesan LCD Co., the Korean supplier of flat-screen parts to Samsung Electronics Co., failed on Sept. 16 because of losses on derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. KJ Pretech is losing $383,000 a month on similar trades.
``We are making up for currency losses with dollars from overseas sales,'' Lee Jeong Dae, head of the Hwaseong-based KJ Pretech's finance team, said in an Oct. 14 telephone interview. ``For now, it's manageable but we're at a loss how to get it through should export orders fall.''
Mumbai-based Sundaram Multi Pap Ltd., which makes school note books, is one of 12 companies that filed lawsuits against banks accusing them of hiding risks on the currency products they marketed. Mexico City-based Controladora Comercial Mexicana SAB, the country's third-largest supermarket chain, filed for bankruptcy last week because of losses linked to the peso's drop.
`Bad Trades'
``The unwinding of these bad trades is causing all types of problems,'' Tony Volpon, chief economist at Sao Paulo-based brokerage CM Capital Markets, wrote in a note to investors last week. The banks that sold the trades also ``hedged themselves,'' exposing them to similar funding calls, he wrote.
The won was Asia's best-performing currency in the four years to Oct. 31, 2007, soaring 31 percent to a decade high of 899.60 per dollar. That encouraged companies to buy contracts that lock in an exchange rate or profit from a drop in dollars.
South Korea's banks were the main sellers of the contracts. They borrowed dollars and converted them to won because they also wanted to fix a price for the U.S. currency to limit their exposure. That contributed to an almost tripling of the nation's external debt due in a year to $176 billion between the end of 2005 and June 30 this year.
There's a more than 50 percent chance Korean banks won't be able to find foreign funding, threatening their ability to repay short-term debt, S&P said in an Oct. 15 report.
Slowing Economies
Emerging market countries must still contend with a slowing global economy. The IMF's World Economic Outlook forecast this month that global growth will weaken to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a world recession under the fund's definition.
``India is still not going to get capital flows when the global liquidity conditions begin to ease,'' said Ajay Seth, chief general manager of finance at New Delhi-based Maruti Suzuki, which sells its Alto small car in Europe. The rupee will fall to 49 per dollar again ``very soon,'' he said.
Slowing exports and rising import costs prompted South Korea's central bank to forecast a $9 billion deficit in its current-account this year. Brazil is forecasting a $28.8 billion deficit in the broadest measure of trade.
``There's a funding problem in dollars worldwide,'' said Rajeev De Mello, head of Asian bonds in Singapore for Western Asset, which manages about $600 billion.
To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
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