Korean Won Declines as Recession Erodes Demand; Bonds Advance

By Kim Kyoungwha and William Sim

Nov. 19 (Bloomberg) -- South Korea's won fell for a seventh day as the risk of a global recession prompted overseas investors to cut holdings of emerging-market assets. Bonds rose.

The Korean currency dropped 8 percent versus the dollar since Nov. 10, extending this year's slide to 35 percent, as the Kospi index of stocks declined for a seventh day. Domestic demand is deteriorating, slowing economic growth, Vice Finance Minister Kim Dong Soo said today. Global funds pulled $37 billion out of Korean stocks this year, according to Korea Exchange.

``There's steady demand for fund remittances from foreign investors,'' said Jo Hyun Suk, a currency dealer with Korea Exchange Bank in Seoul. The won's loss may be limited as ``exporters are offloading some dollars on a perception that the greenback may have hit a short-term peak.''

The won weakened 0.2 percent to 1,451.50 per dollar at 12:45 p.m. local time, according to Seoul Money Brokerage Services Ltd.

The U.S., Europe and Japan are in recession and the International Monetary Fund this month forecast global economic growth will slow to 2.2 percent next year from an estimated 3.7 percent in 2008. The fund has said expansion of 3 percent or less is ``equivalent to a global recession.''

South Korea revised its forecast for the nation's 2009 trade balance to a deficit of $5.6 billion from a $1.2 billion surplus, Yonhap News reported today, citing a document submitted to parliament. The government cut its estimate for consumer spending growth to 2.5 percent from 4.5 percent.

Bonds Advance

Korea's bonds rose as Bank of Korea Governor Lee Seong Tae said at a meeting with economists that the central bank will take ``active'' steps to provide short-term liquidity in the financial markets.

Demand for government debt also firmed after the Seoul Economic Daily reported that the Bank of Korea may supply 10 trillion won ($6.95 billion) to banks to buy company bonds and shore up the corporate debt market.

The funds may be provided by buying back government debt from banks, the newspaper said, citing central bank officials it didn't identify. The central bank purchased 1 trillion won ($689 million) of government bonds as planned today in a bid to help stabilize the local debt market.

The yield on the benchmark bond due June 2011 fell nine basis points or 0.09 percentage point to 5.27 percent, according to the Korea Securities Dealers Association.

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