Korean Won to Drop as Surplus ‘Masks’ Woes, Nomura, Goldman Say

By Kim Kyoungwha

Dec. 1 (Bloomberg) -- The South Korean won’s one-week rally from a decade low will end as slowing export growth erodes the nation’s record current-account surplus, according to Nomura International Ltd. and Goldman Sachs Group Inc.

Goldman lowered its year-end won forecast to 1,500 per dollar from a previous prediction of 1,300, Kwon Goohoon, the Seoul-based economist at the company, wrote in a report last week. Korea’s Finance Minister Kang Man Soo said Nov. 28 the current- account surplus will top $1 billion in November after a $4.9 billion surplus in October. Exports fell 18.3 percent last month, the most since December 2001, government data showed today.

“The surplus masked a worsening economy which is suffering from job losses as economic activities shrank fast,” said Kwon Young Sun, a Hong Kong-based economist with Nomura. “Behind the surplus is cooling consumption that led imports to slow faster than exports.”

The won climbed 0.6 percent to 1,461.25 as of 11:51 a.m. in Seoul, compared with 1,469.00 at the end of last week, when the currency rose 1.8 percent, according to Seoul Money Brokerage Services Ltd. The won is down 37 percent this year, the worst performance among the 10 most-traded Asian currencies outside of Japan.

Goldman predicts the won will end 2009 at 1,300 to the dollar.

South Korea’s $970 billion economy grew at the slowest pace in four years in the third quarter. Macquarie Securities Ltd. last week forecast gross domestic product will contract 2 percent next year and UBS AG said Nov. 21 the economy will shrink 3 percent.

Imports Decline

Imports fell 14.6 percent last month after increasing 10.4 percent in October and 45.8 percent in September. Export growth shrank from 8.5 percent in October and 28.1 percent the prior month, the finance ministry said in a statement today.

In a sign of weaker growth ahead, factory output dropped for the first time in 13 months in October, data last week showed. Output dropped 2.4 percent from a year earlier after rising 6.2 percent in September, the statistics office said on Nov. 28.

Policy makers in South Korea have cut interest rates at an unprecedented pace, guaranteed lenders’ debts, secured an Oct. 30 agreement from the Federal Reserve to provide $30 billion in U.S. currency and announced an $11 billion stimulus plan. President Lee Myung Bak last week called for more measures to create jobs and spur spending in the ailing economy.

“We expect the Korea economy to register negative growth in the first quarter,” Goldman’s Kwon wrote in a report on Nov. 27. “Our revision entails negative growth for exports.”

Bond, Stock Sales

Further damping demand for the won, the capital account had the largest monthly net outflow on record in October at $27.4 billion, according to central bank figures released last week, as banks made “massive payments” on external debt.

“The risk remains of further large and unexpected net capital outflows,” Nomura’s Kwon said. “We expect foreign capital to eventually return to Korea, but only once global risk aversion recedes and a gradual economic recovery begins, which we believe could be in the second half of 2009.”

Overseas investors pulled $37 billion out of Korean equities this year, according to data compiled by Bloomberg. Foreign investors, who turned net sellers of local bonds for the first time in two years in July, sold 4.2 trillion won ($3.2 billion) more debt than they bought in October after net purchases in the previous two months, data from Financial Supervisory Services shows. As of end-October, funds abroad held a combined 44 trillion won of Korean bonds.

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