Korean Won Hits Decade-Low, Kospi Slides as Risk Appetite Wanes

By Kim Kyoungwha and Shin Saeromi

Nov. 20 (Bloomberg) -- South Korea's won slid below 1,500 per dollar for the first time in a decade and stocks fell for an eighth day, the longest losing streak since 2003, as a global recession prompted investors to pull funds from emerging markets.

The slide in equities almost wipes out the Kospi index's 26 percent rebound from a three-year low on Oct. 24., a rally that was powered by unprecedented interest-rate cuts and the government's announcement of a 14 trillion won ($9.3 billion) stimulus package. Korean exports are likely to decline this month for the first time in a year, an official at the Ministry of Knowledge Economy said today, declining to be identified.

``The unstable forex market is serving as a big, big drag on stocks,'' said Im Jeong Jae, a fund manager at Shinhan BNP Paribas Investment Trust Management Co. in Seoul, which oversees the equivalent of $533 million in equities. ``Some economic forecasts are so pessimistic they're making people worry that even we may face a recession.''

The won slid as low as 1,523 per dollar before trading down 3.4 percent at 1,497 as of the 3 p.m. close, according to Seoul Money Brokerage Services Ltd. The Kospi fell 6.7 percent to 948.69, extending this year's decline to 50 percent, and the technology-laden Kosdaq index tumbled 8.2 percent after U.S. benchmarks closed at five-year lows.

Federal Reserve policy makers last month predicted the U.S. economy will contract through the middle of 2009, with some prepared to cut interest rates further in response, according to a record of their meeting released yesterday. Japan's exports fell in October at the fastest pace in almost seven years, according to trade figures published today.

Hynix, Samsung

Hynix Semiconductor Inc., the world's second-largest computer-memory maker, tumbled 15 percent after UBS AG initiated its coverage on the stock with a ``sell'' rating, citing a worsening profit outlook for next year.

KB Financial Group Inc., the holding company for South Korea's No. 1 bank, also plunged 15 percent as did STX Pan Ocean Co., the country's largest bulk carrier. Samsung Electronics Co., the nation's biggest exporter, dropped 3.4 percent.

``Investors are responding to growing visibility of a global recession,'' said Song Seong Yeob, head of equities at KB Asset Management Co. in Seoul, which manages the equivalent of $1.2 billion in equities.

Trade Deficit, Bankruptcies

South Korea's economic growth slumped to a four-year low in the third quarter and the government yesterday revised its forecast for the 2009 trade balance to a deficit of $5.6 billion from a $1.2 billion surplus. Corporate bankruptcies rose to their highest level in more than three years in October, a Bank of Korea report showed yesterday.

The won has dropped 37 percent this year versus the dollar, the worst performance among Asian currencies, as overseas investors pulled $23 billion out of Kospi shares. Suspected foreign-exchange sales failed to keep the won from breaching 1,500 versus the dollar for the first time since 1998.

``There's talk South Korea's central bank has been intervening today to sell the dollar and buy the won,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``There's a possibility other Asian central banks may also sell the dollar to temper excessive declines in their currencies, leading to downward pressure on the greenback.''

Overseas investors, which turned net sellers of local bonds for the first time in two years in July, sold 4.2 trillion won more debt than they bought in October after net purchases in the previous two months, according to data from the Financial Supervisory Services. At the end of October, they held a combined 44 trillion won of Korean bonds.

State Funds

To help buffer falling foreign demand, the government plans to revise legislation to allow its $24.8 billion sovereign wealth fund to invest in local stocks and bonds, the finance ministry said yesterday. Under the revised law, Korea Investment Corp. can also secure funds by taking out loans and issuing bonds, it said.

Government bonds were little changed, wiping out an earlier advance, as the won's decline spurred sales. The yield on the benchmark bond due June 2011 stood at 5.16 percent, after falling as much as 17 basis points earlier, according to Korea Securities Dealers Association. A basis point is 0.01 percentage point.

``The won's rapid fall threw cold water on the bond market, which was pricing in a growing chance of rate cuts,'' said Seo Chul Soo, a fixed income strategist with Daewoo Securities Co. in Seoul. ``Foreign selling of bonds will only intensify should the currency keep falling at this pace.''

Demand for bonds firmed earlier on optimism the central bank will reduce its benchmark interest rate further to help the economy, after 1.25 percentage points of cuts since the start of last month. Bank of Korea Governor Lee Seong Tae most recently trimmed the rate on Nov. 7, to 4 percent, and has hinted he's ready to act again to support the economy.

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