South Korea Pension Fund to Buy $5.7 Billion in Bonds

By Saeromi Shin and Kim Kyoungwha

Oct. 23 (Bloomberg) -- South Korea's National Pension Service, the nation's biggest investor, plans to cut its overseas investments and buy domestic bonds to help the nation weather its worst financial turmoil in a decade.

The fund will purchase at least 8 trillion won ($5.7 billion) of domestic debt, mostly bonds issued by banks and companies, said Kim Moonsoo, head of the fund's institutional networks and communications. The pension service, which held 228 trillion won of assets as of Sept. 30, plans to have local bonds account for 72.4 percent of assets by the end of 2008, up from an earlier target of 66.4 percent, a government statement said.

Policy makers are pumping money into the economy by cutting interest rates, guaranteeing bank debt and making more money available for small businesses as global credit crunch aggravates a shortage of funds. The pension fund's purchase will help banks and companies refinance maturing local debt.

``The fund's move seems positive as it will ease tight funding conditions,'' said Park Se Girl, a fund manager at Meritz Asset Co. in Seoul, which manages the equivalent of $1.6 billion in assets including bonds. ``On the fund's side, it will be an opportunity to snap up bonds at bargains as tight money flow has pushed down bond prices lately.''

Concerns about financial markets and surging funding costs have prompted the government to announce $130 billion of support for banks measures to aid the construction industry.

The rate on 91-day certificate of deposits, a key money market rate in South Korea, rose to 6.16 percent today, the highest level since January 2001. The spread between bonds issued by banks and government debt with maturities of one or three years, a measure of credit risk for banks in local currency terms, has widened to the most since at least 2000, according to Hana Daetoo Securities Co. in Seoul.

Slowing Growth

South Korea is preparing a plan that will provide cash to brokerages and asset managers to help bring confidence back to the nation's financial markets. The Bank of Korea may buy 25 trillion won of local bank debt maturing by the end of year, the Korea Economic Daily reported this week.

The won has fallen 34 percent against the dollar this year as overseas investors withdrew their funds from riskier emerging-market assets and as higher oil-import costs sent the current account into a deficit. The Kospi has slumped 44 percent.

The instability in the global economy has been continuing and concern about a recession is deepening, which requires the national pension fund to become more ``flexible'' in its investment plan, the Ministry of Health, Welfare and Family Affairs said in a statement today.

The International Monetary Fund now expects South Korea's economy, Asia's fourth-largest, to grow 4.1 percent this year, down from its earlier forecast of 4.2 percent and last year's 5 percent.

To contact the reporter on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.