Korean Won Falls to Seven-Year Low; Government May Use Reserves

By Kim Kyoungwha and Seyoon Kim

Oct. 7 (Bloomberg) -- South Korea's won slumped to a seven- year low on speculation turbulence in global financial markets will prompt investors to steer clear of emerging-market assets.

The currency, Asia's worst performer this year, tumbled as much as 7 percent, the most since December 1997 when the nation sought an emergency loan from the International Monetary Fund to meet debt payments. The government will use its currency reserves, the world's sixth-largest, to provide funds as needed, Deputy Finance Minister Shin Je Yoon said today.

``The government should try to ease the won's drastic drop, to calm investors, with its ample reserves,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. ``South Korea is much sounder in terms of economic fundamentals than it was during the 1997-1998 financial crisis.''

The won fell 4.4 percent to 1,328.10 per dollar as of the 3 p.m. close in Seoul, according to Seoul Money Brokerage Services Ltd. It touched a low of 1,364.05 today, the weakest since April 2001, and is down 30 percent this year.

South Korea's Kospi stock index gained 0.5 percent, after yesterday sliding 4.3 percent as a sell-off in global equities wiped out more than $2 trillion of market value. Overseas investors sold more of the country's shares then they purchased on all but 15 days since May.

Investors shouldn't overreact to the global financial turmoil as the government can cope and is preparing ``various'' measures to address the situation, said Rhee Chang Yong, vice chairman of South Korea's financial regulator. Deputy Finance Minister Shin said later in the day that the authorities will check for ``speculative'' activity in the currency market.

Panic Spreading

South Korea has been building up its currency reserves since the financial crisis led to the won halving in value in 1997. Those funds fell for a fifth month in August to $243.2 billion, according to the central bank, as policy makers intervened to stem the won's more recent decline.

``Sentiment is extremely unstable as the crisis seems to be spreading fast,'' said Jay Won, a currency dealer at Korea Exchange Bank in Seoul. ``People are panicking and they only want to hold dollars.''

Traders said the central bank yesterday intervened in the market after the currency slumped as much as 5.6 percent. Policy makers try to influence exchange rates by buying or selling foreign currencies.

The government's priority is to stabilize the won, Finance Minister Kang Man Soo said yesterday. He urged banks to sell overseas assets to raise cash they can use to lend to local companies struggling with rising offshore borrowing costs. Lack of access to funds makes it harder for companies to pay wages and buy raw materials.

Maturing Loans

``This is not typically a fundamental problem,'' said Mirza Baig, a currency strategist in Singapore at Deutsche Bank AG, the world's top currency trader. ``But when you are in the middle of a crisis, it does become a fundamental problem because nobody is prepared to refinance your maturing loans.''

Kia Motors Corp., South Korea's second-biggest carmaker, may repay 300 million euros ($408 million) of debt coming due in November with cash reserves or bank loans as the global credit crunch makes selling new bonds difficult, analysts said.

``Money is getting expensive,'' said Kevin Lee, an analyst at Good Morning Shinhan Securities Co. in Seoul, who estimates the company currently has access to about 1 trillion won. ``They would like to refinance with euros, but it won't be easy.''

Bonds Advance

Korea's government bonds rose on speculation policy makers will ease their monetary stance after a local newspaper reported the central bank may cut the reserve requirements for banks to help increase liquidity in the market.

The central bank may reduce the reserve ratio requirement and increase lending via repurchase agreements, the Korean- language Seoul Economic Daily reported, citing a government official it didn't identify.

Bank of Korea Governor Lee Seong Tae and fellow policy makers meet Oct. 9 to review interest rates. The bank kept its benchmark rate at an eight-year high of 5.25 percent last month.

The yield on the 5.5 percent note due June 2011 fell 10 basis points to 5.66 percent, according to Korea Exchange. The price rose 0.27, or 27 won per 10,000 won face amount, to 101.39. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Seyoon Kim in Seoul at skim7@bloomberg.net.